'Give It Away And Pray' Isn't A Business Model... But It Doesn't Mean That 'Free' Doesn't Work

from the once-again...-with-feeling dept

I've been noticing an interesting trend lately. While more folks aren't totally averse to the idea that they need to somehow embrace "free," they're mishandling what they do with "free" and then going on to complain how "free" doesn't work. The basic problem is this: they hear about the importance of "free" and so they give something away for free. But they don't have a business model around the free content. They don't understand the economic forces at work. They just give stuff away and pray... and then whine when nothing happens. As we've pointed out before, no one says that "free" by itself pays the bills. You need to have a more complete strategy than that -- and it involves a lot more than "give it away and pray." It's good that they're at least trying, but if they don't understand the real issues and fail at the experiments, they suddenly come back and claim that "free" isn't the answer, and suddenly rule out all business models involving free. And that is a real recipe for failure.

The latest to head down this road is NY Times columnist David Pogue, who bashes the idea of digital publishing of books by pointing to a long and interesting blog post from author Steven Poole, who did the "give away and pray" option along with a tip jar. It didn't make him much money. That shouldn't be any surprise, because tip jars aren't a real business model. But, because Poole seemed to have an expectation in his mind, he ends up being quite disappointed, noting that 1 out of every 1,750 downloads (0.057%) left some money. What's left implicit here is that that figure is too low. What this really means is that Poole didn't really give away the book for free. He had an expectation that people would magically pay for it. But, that's not a business model. That's not tying the free and infinite good to other scarce goods that will help you make money.

Unfortunately, both Pogue and Poole then use this to bash the entire concept of free-based business models, with Poole getting unnecessarily offensive in his response:

"I'll call it, for short, "the Slashdot argument". It says that books, music, films, software and so on ought to be freely distributed to anyone who wants them, simply because they can be freely distributed. What is the writer or musician to do, though, if she can't earn money from her art? Simple, says the Slashdotter: earn your money playing live (if you're one of those musicians who plays live), or selling T-shirts or merchandise, or providing some other kind of "value-added" service. Many such arguments seem to me to be simple greed disguised in high-falutin' idealism about how "information wants to be free". Perhaps it's not empty pedantry to point out that "information" doesn't want anything in and for itself. The information in which humans traffic is created by humans. And most information-creating humans need to earn dollars or yuan to survive.

While I'm sure there may be some Slashdot-types who may make this argument, it doesn't mean that it's an accurate representation of the more important discussion of these business models. The main problem is his use of "ought," as in people saying things "ought" to be free. It's not that things ought to be free because they can be free -- but that things will be free because that's just basic economics. Price gets driven to marginal cost in a competitive market, and the reason it happens is because others do learn to put in place business models that work, and then if you're the lone holdout, people start to ignore you. Also, I'll note that that Poole brushes off the (indeed, simplistic) business model suggestions as being "high falutin' idealism" but fails to actually try out any real business model.

And then he weakly follows it up by implying that you can't earn money by giving away stuff for free. But, again, he's blaming the wrong thing: he's blaming free for his own failure to use a real business model where the free offering was closely tied to additional scarcity he could sell. He continues, getting even more insulting as he goes:

In any case, I think the Slashdot argument can actually be disposed of rapidly with one rhetorical question, as follows.

Oh Mr Freetard, you work as a programmer, do you? How interesting. So do you perform all your corporate programming duties for free, and earn your keep by selling personally branded mousemats on the side?

Didn't think so.

This misleading and mistargeted argument has been debunked so many times, it's disappointing to see both Poole and Pogue repeat it. But, since it needs a response, let's do it again: you give away the infinite goods, not the scarce goods. Your time is a scarce good. No one is saying that everything needs to be free -- they're saying that infinite goods will be free, because of it's very nature in economics. In fact, Poole's argument is particularly weak when it comes to programmers, because most programmers don't earn any kind of royalties for the software they write. They are paid a salary, for their time -- but not for the software itself (which is an infinite good). And, I won't even get into the number of programmers who work on open source projects for free... or the fact that Poole is blogging for free...

Again, Poole and Pogue are so focused on free, that they fail to distinguish between infinite and scarce goods or the business models involved in what's going on. Poole then weakly dismisses the Radiohead experiment:

Perhaps I could have tried distributing Trigger Happy the Radiohead way, making sure you had to pay a minimum to get the goods. Would I still have attracted 30,000 readers like that? I doubt it. The sublime In Rainbows seems to have been a nice little earner for Radiohead, but that's because they're Radiohead -- and they became Radiohead through the nasty old music-industry business model. So did Nine Inch Nails, whose recent internet release of (the excellent) Ghosts was very clever -- the first nine songs of a triple album for free in compressed mp3; the whole thing in a lossless format for $5. But if there's been a comparable success by a band that hasn't already gained its cultural capital and name-recognition through the evils of copyright and corporate promotion, I'd like to know about it.

Poole and Pogue (who quotes the same snippet) both miss the fact that in both cases described above, the bands in question didn't "give away and pray," but both put together real strategic business models that were focused on using the infinite goods (the music) to sell more scarce goods. In the case of Radiohead (despite some claims to the contrary) at the same time Radiohead announced the downloads it also told fans that it would be selling a beautiful "discbox" for the album as well. This was a very valuable scarce good -- that the free music made a lot more valuable by increasing the demand for it. As for Nine Inch Nails, Trent Reznor offered a tiered system of scarce goods that were all made more valuable by the availability of the music -- proven by the fact that Reznor quickly sold out of his limited edition deluxe offering.

And I still chuckle about the argument that these models "only work for big bands." That's because a few years ago, when we pointed out how this worked for some small up-and-coming bands, people would whine "but that only works for small bands -- big bands would be screwed!" The model, when well designed works for small bands just as well as big bands. No, it might not turn around millions in a week, but it can certainly help an artist make a living. Witness the case of Maria Schneider, who ended up making a Grammy-winning album using some the concepts discussed around these parts. And, of course, we've worked out the details of the type of business model that an up-and-coming band could use to embrace these concepts to grow.

So, it's nice to see someone at least willing to explore the concept of free without shutting out the possibility. But free alone isn't a business model. And it's wrong to blame free for the lack of establishing a complete business model. Just because "give it away and pray" isn't a workable business model, that doesn't mean that there aren't business models that do work. Hopefully, Poole and Pogue will eventually recognize that they're dismissing the wrong thing. They shouldn't be complaining about free (or making misleading accusations about those who simply recognize the economic forces at work) -- they should be complaining about a failure to put in place a real business model to take advantage of what will be free.

Reader Comments

Just an observation...

It is useful to keep in the back of one's mind that many of these "infinite" goods acquired that trait when a "scarce" good was distributed and later injected into the "marketplace" by someone having no authority to do so.

Re: Just an observation...

It is useful to keep in the back of one's mind that many of these "infinite" goods acquired that trait when a "scarce" good was distributed and later injected into the "marketplace" by someone having no authority to do so.

No, you miss my meaning. The goods are *fundamentally* infinite, by the very fact that there is zero marginal cost to duplicate. The point has nothing to do with unauthorized copies. It's about the fundamental nature of the good, which can be seen in its marginal cost.

The point is that if you fail to recognize this, you're going to be in trouble when others create successful business models and you're left clinging to an unsustainable one.

Re: Re: Just an observation...

"No, you miss my meaning. The goods are *fundamentally* infinite, by the very fact that there is zero marginal cost to duplicate. The point has nothing to do with unauthorized copies. It's about the fundamental nature of the good, which can be seen in its marginal cost."

A book in printed form is "scarce" by your definition, even though marginal costs for printing it may approach zero. Being scarce it has, in my vernacular, "value" to some persons in the marketplace. The same can be said for digital goods in the sense that they remain "scarce" even though marginal costs are zero, or something pretty darn close, unless and until they are released into the market on an unrestricted basis. My point is simply I am troubled that a "scarce" good, even one with zero marginal cost, is automatically fair game once a miscreant unilaterally decides to wrongfully distribute the work for free to the world at large.

Re: Re: Re: Just an observation...

You seem to have missed the point again.

A printed book is not an "infinite good". It can theoretically be reproduced infinitely, but each reproduction involves a cost, physical materials, physical labour, shipping costs, etc. This will never approach zero, but the market value of the book will approach the marginal cost involved in creating it (or less - e.g. supermarkets using some books as a loss leader to increase business in other areas). This is a scare good because these costs have to be planned and managed.

Zero marginal cost applies to the digital goods. it costs the same to produce a million copies as it does to create one. Hence, infinite good.

Again, this has nothing to do with piracy so please stop trying to muddy the argument with that fallacy. As a consumer, I recognise that a physical hunk of printed paper in my hand cost a lot more than a PDF on my computer screen, so I am willing to pay more for it. You cannot demand the same payment for a digital good because I know that it didn't cost as much to produce.

Re: Re: Re: Just an observation...

A book in printed form is "scarce" by your definition, even though marginal costs for printing it may approach zero. Being scarce it has, in my vernacular, "value" to some persons in the marketplace. The same can be said for digital goods in the sense that they remain "scarce" even though marginal costs are zero, or something pretty darn close, unless and until they are released into the market on an unrestricted basis. My point is simply I am troubled that a "scarce" good, even one with zero marginal cost, is automatically fair game once a miscreant unilaterally decides to wrongfully distribute the work for free to the world at large.

But no one's talking about taking the printed scarce good and having these "miscreants" (and you accuse me of loaded language?) turn it into an infinite good?

The point remains: you keep confusing the economic viewpoint of the producer of the content with the folks who may share it in an unauthorized manner. It makes this discussion rather silly.

Again, if you can embrace this in a way where everyone does better, what's to complain about? You have this moral hatred for folks who may be better off, and I just don't get it.

Re: Re: Re: Re: Just an observation...

The confusion is easy to understand as the content is an infinite good which allows the distributor to distribute it at NO cost.

The content in music, books and video has always been an infinite good; what in the past made the goods scarce was not the content but the physical limits, consisting of labor and material, which limited distribution.

Re: Re: Just an observation...

That's precisely why copyright promotes the production of creative works.

The decision of whether or not to produce in the short run depends on being able to sell at a price that covers the marginal cost. In the long run, however, the price has to cover at least the average total cost, plus the market rate of return (including an appropriate risk premium).

If a producer expects to earn enough in the long run to cover at least the average total cost and the market rate of return, then he'll enter the market (or be indifferent in the case of precise equality). If not, he won't. Without copyright, there is a disincentive to produce (ie a negative profit), so only those with non-economic motivations and a sufficient alternative source of financial support will produce creative works.

Giving away one good in order to increase demand for another may work in some cases, but in general I doubt it would work for most of the cases currently protected by copyright. Production of creative works that consumers would voluntarily pay more than marginal cost for, and that producers would voluntarily sell to them at such prices, would therefore in many cases not occur, meaning society would be worse off.

Re: Re: Re: Just an observation...

That's precisely why copyright promotes the production of creative works.

Oh really?

The decision of whether or not to produce in the short run depends on being able to sell at a price that covers the marginal cost. In the long run, however, the price has to cover at least the average total cost, plus the market rate of return (including an appropriate risk premium).

Not quite. That may be true in textbook economics, but reality is a little more complicated, because the real producer looks at the overall ecosystem, not just one product. Thus, if producing product A boosts demand so much for complementary product B, then product A will get produced even if it's sold at a loss.

If a producer expects to earn enough in the long run to cover at least the average total cost and the market rate of return, then he'll enter the market (or be indifferent in the case of precise equality). If not, he won't. Without copyright, there is a disincentive to produce (ie a negative profit), so only those with non-economic motivations and a sufficient alternative source of financial support will produce creative works.

Unfortunately, the second half of this paragraph is incorrect. You assume, incorrectly, that copyright is the only way to create this incentive. Historically that has not been shown to be true at all. What *has* been shown to be true is that the complementary products associated with the content are driven up in value enough to pay for the creation of the content.

Giving away one good in order to increase demand for another may work in some cases, but in general I doubt it would work for most of the cases currently protected by copyright.

You may doubt, but the economic history suggests you would be wrong to doubt that.

Production of creative works that consumers would voluntarily pay more than marginal cost for, and that producers would voluntarily sell to them at such prices, would therefore in many cases not occur, meaning society would be worse off.

Re: Re: Just an observation...

I must admit...

...that I made my above comment without having read the linked articles. Mine was merely a reaction to the notion that "infinite" goods by themselves are essentially valueless, and that one must tie such goods to "scarce" goods in order to achieve an income stream. Of course, my observation was merely to note that many of the now "infinite class" became so because some people see nothing wrong with taking something that is "scarce" are releasing it to the world knowing full well that what they are doing is wrong, both legally and morally.

I have since read the two articles and am a bit disturbed that how they are described in the above techdirt article is terribly inaccurate. The initial link states that in a couple of instances the author provided digital copies of books being sold in print as a special favor to purportedly "blind" individuals (presumably, there is a way to transcribe a PDF file into a braille copy). All this author is saying is that in his situation print copies serve his needs best.

The other linked article makes reference to an experiment of sorts, and not to the pursuit of a "business model doomed to failure" as Mr. Masnick suggest. Even the author agrees with that characterization based upon the empirical results of his experiment. The author then goes on to agree with Mr. Masnick's basic premise that the free release of digital goods can have beneficial effects on the quantity of sales for his scarce products, books in print.

What the second author does point out, however, is that not every creator of works of authorship fits neatly into the mold advocated here. While certainly many do, it is far too broad a generalization, and perhaps even reflects a degree is disdain, as to those whose livelihoods depend upon the creation of works that by nefarious means are unlawfully placed on the internet by persons having nothing better to do than "tweak the nose" of a legal system that attempts to provide some form of safe harbor. It seems that many of these miscreants are convinced that media conglomerates are "bad, bad, bad...), and justify their actions by the simple expedient of believing they are sticking it to the "man". In my view it is indeed a sad commentary on the moral and ethical principles scuh persons are in sore need of learning.

Mr. Masnick, you do have an "agenda" that promotes the reality of economic priciples once goods become "infinite". I do, however, believe that to some degree it provides unwitting support to those who choose to cheat.

Please do not get me wrong. DRM and other technologies that stick it to otherwise loyal customers in a short sighted and unfair approach. They are punishing the innocent for the actions of the wrongdoers. What troubles me (or as Joaquin Phoenix said in Gladiator..."I am sorely vexed..." is that legitimate means to try and stop cheaters from plying their "trade" is to some degree being derided with a constant stream on what borders on invective and disdain simply because some people are trying to protect the fruit of their labors from those who would deny them the opportunity to try and receive and income stream.

You focus on economics. I focus on law, all the while mindful that your economic points are in consonance with basic economic principles. Where we diverge is that I lend significant credence to the moral dimension of the issue. What is good for our economy does not necessarily translate into what is good for our society. I do not profess to know and articulate what is good for our society, but I am convinced that it involves significantly more considerations that merely economics.

Re: I must admit...

"Of course, my observation was merely to note that many of the now "infinite class" became so because some people see nothing wrong with taking something that is "scarce" are releasing it to the world knowing full well that what they are doing is wrong, both legally and morally."

Bull. The infinite goods became such because they were transferred to digital formats. Digital goods cost nothing to reproduce and next to nothing to distribute.

You seem to be referring to piracy, which is a strange reference in response to an article discussing content creators who have released their own products for free by their own choice.

"What troubles me ... is that legitimate means to try and stop cheaters from plying their "trade" is to some degree being derided with a constant stream on what borders on invective and disdain simply because some people are trying to protect the fruit of their labors from those who would deny them the opportunity to try and receive and income stream."

Erm, what? Exactly what does that have to do with this article? Which "legitimate means" are you referring to if you've already dismissed DRM as being unworkable?

"You focus on economics. I focus on law"

Nothing in these articles support breaking the law. The economic facts are that price will always naturally approach marginal cost due to market pressures. Digital goods have a marginal cost approaching zero.

Re: I must admit...

Mike focuses on economics. You focus on the law and morality.

Beyond either of those there's a more fundamental consideration: Practicality. If, as a practical matter, you cannot stop a behavior (either by force of law, force of morality, peer pressure or some other way) then arguments from economics and law both are moot.

Underlying fact about not-for-profit copying today is that you cannot stop it. (For-profit copying is easier to stop because there's a money trail.)

However the rather special case of copying someone else's work as a "free" good is pretty much beside the point of the original post. It's not quite a straw man argument in this context, but in my opinion raising it only serves to confuse the fundamental issue.

Re: I must admit...

..that I made my above comment without having read the linked articles. Mine was merely a reaction to the notion that "infinite" goods by themselves are essentially valueless

MLS, what bothers me is that you repeat these kinds of statements, even though we've pointed out how incorrect they are in the past. Infinite goods are no more valuless than is air. Air has plenty of value, yet you don't pay for it, because it is abundantly available.

It's simply the supply and demand curve. If the supply is abundant the cost will go away.

It has TONS of VALUE, however. But value and price are separate things. Value is a component of the demand curve, but it is not the determinant of price. It's the determinant of the maximum price that someone will pay.

So please stop saying that we are claiming an infinite good has no value.

We're saying something quite different. It has plenty of value. The trick is figuring out the way to capture that value -- and that's to figure out a way to connect the infinite good to a scarce good where the value can be captured.

I have since read the two articles and am a bit disturbed that how they are described in the above techdirt article is terribly inaccurate.

I don't see how my summarization is inaccurate.

The initial link states that in a couple of instances the author provided digital copies of books being sold in print as a special favor to purportedly "blind" individuals (presumably, there is a way to transcribe a PDF file into a braille copy). All this author is saying is that in his situation print copies serve his needs best.

I wasn't discussing that part of his post, but the part where he repeats all of Poole's assertions.

The other linked article makes reference to an experiment of sorts, and not to the pursuit of a "business model doomed to failure" as Mr. Masnick suggest. Even the author agrees with that characterization based upon the empirical results of his experiment.

But he blames "free" rather than the business model he chose for free. That's the important point, which is exactly what I pointed out in my post.

I fail to see how that's inaccurate in the slightest.

What the second author does point out, however, is that not every creator of works of authorship fits neatly into the mold advocated here.

Huh? First of all, there is no "mold advocated here." I am merely pointing out the economic realities, as well as pointing to *numerous* different business models that can then be put in place to respond to those economic realities.

And, to deny that those economic realities exist, or to blame a failed business model on "free" is simply incorrect.

While certainly many do, it is far too broad a generalization, and perhaps even reflects a degree is disdain, as to those whose livelihoods depend upon the creation of works

Yikes. How is it possibly disdain to explain the economic forces at work, and back it up with business models that will help them make more money? I simply don't understand how you could find that disdainful.

that by nefarious means are unlawfully placed on the internet by persons having nothing better to do than "tweak the nose" of a legal system that attempts to provide some form of safe harbor. It seems that many of these miscreants are convinced that media conglomerates are "bad, bad, bad...), and justify their actions by the simple expedient of believing they are sticking it to the "man". In my view it is indeed a sad commentary on the moral and ethical principles scuh persons are in sore need of learning.

Again, if you can learn how to use that to your advantage in such a way that it helps make you more money... who cares what their rationale for doing what they do is?

If I gave you two situations:

(1) You could make 25% higher salary that you do today, but some people will get stuff for free, while a huge population gets impacted by your work.

or

(2) You could make 25% less salary than you do today, but a smaller group of people get touched by your work -- though all of them pay for it.

Wouldn't you say that situation 2 is better in almost every single way? No one is worse off. And yet, you're claiming that situation 2 is more moral? How is it possibly more moral when everyone (both you and the people you impact) are worse off? That makes no sense to me.

Mr. Masnick, you do have an "agenda" that promotes the reality of economic priciples once goods become "infinite". I do, however, believe that to some degree it provides unwitting support to those who choose to cheat.

That is an externality of the explanation -- which is directed at those who create, not those who consume. But, the point above stands. What does it matter if you can embrace these principles and do better due to it?

You focus on economics. I focus on law, all the while mindful that your economic points are in consonance with basic economic principles. Where we diverge is that I lend significant credence to the moral dimension of the issue.

I give significant credence to the moral dimension as well, but as I have made clear:

Re: I must admit...

Of course, my observation was merely to note that many of the now "infinite class" became so because some people see nothing wrong with taking something that is "scarce" are releasing it to the world knowing full well that what they are doing is wrong, both legally and morally.

What we have here is a complete failure to understand.

The meaning of infinite goods is a good in which there is a ZERO marginal cost of reproduction. The reason that such goods can be copied and distributed is because they are infinite goods in the first place.

Taking an infinite good and placing any form of DRM on it does not make it a scares good which means there is a marginal cost ie it cost real dollars for each additional book produced in the form of printer labor, paper and ink to produce the book and then shipping cost to move the book from the printer to the distributor and addition cost for the retailer to distribute. Now compare that to an infinite good where the total cost of making an additional copy is the cost of running to computers and the interconnection to make the copy, a total cost of production of less than $.01

If you had understood anything about the issue you would have written this phase as follows:

“ some people see nothing wrong with taking something that is “an infinite good” and releasing it to the world knowing full well that what they are doing with the firm belief that what they are doing is both legally and morally correct. “ There is no cost of reproduction.

Knowledge deserves to be free not limited by some pandering pan handler who fails to understand that expecting a free handout each and every time some one thinks that that person is violating their precious intellectual property and they should get paid for patenting the idea first. Not thinking of the idea first but for having the tenacity to run to the government first and declaring that they are the owner of that idea. The application of this idea to music is no more redulicious than your declaration that an “infinite good” is a “scarse good”.

Re: I must admit...

There's a key point that you constantly fail to realize, or conciously ignore. Your arguments revolve around Artist A recording a song and selling CDs, and then Miscreant A buying the CD and ripping the songs to his file sharing network. Everyone here, even Mike, agrees that this is wrong (except in the cases, like NIN's latest CDs, where such behavior is encouraged).

What Mike is actually talking about is what happens to Artist A, who's selling CDs, when Artists B through Z are giving out their music for free. Since it costs the same to make 1 million copies as it does to make 1 copy, these other 25 artists can tie the actually infinite goods to scarce goods (many of which have been pointed out, from concert seats to NIN-style collector's sets) to make their living. Now Artist A, who is preventing people from enjoying his content (he's putting up blocks to getting his music) is out-dated and can't make money because everyone else is under-cutting him. No one is stealing from Artist A, his buisness model just no longer works.

Hasn't he heard of "preview"? In his case, he should've given only a first couple chapters of the book, and charged for the rest of it. frankly, his problems might be just the quality of his work. i mean, c'mon. it'd like getting a bad score on the test and blaming on the test format while ignoring his own ignorance in the test topic. if he was a chick, he'd be one of those really ugly, insecure, overweight, and desperate for sex, who no one wants to be involved with.

Re:

But "preview" doesn't solve the "infinite goods" problem. As long as the resultant is being distributed digitally, then then ultimate price of that good tends to zero (because the cost of its reproduction is zero).

You can then claim that some form of digital management is the answer (only authenticated users can download, use some eReader DRM, etc...) but those are artificial barriers trying to limit the bits. Those bits are designed to reproduce; this is purpose of the digital medium.

They've jumped right from selling over-priced physical products to giving away free digital copies, all without a business plan, as the article states.

What they should be doing (in my opinion) is offering DRM free digital copies at a low price. If you tell people that they don't need to pay for something, many people won't. However, give people a good price and tell them that they have to pay and many people will. At the very least, the bandwidth won't be wasted by people who don't intend to pay. Why even provide them with a free download? If they truly don't want to pay for it, they'll get it elsewhere just as they've always done. 100% of the bandwidth is used by paying customers.

Of course for this to work, the price has to be low enough that people will gladly pay it rather than taking the risk of pirating the content. However, regardless of what they charge, it'll still be more than $free.

You really expect to much if you want artists to create groundbreaking business models that magically make them lots of money, while letting you get the content for free. Wake up to the real world, producing content requires a GREAT investment. If you take enjoyment out of the content, it is only fair that you should pay for it. Samples are fine, but if you give away your entire content for free, you leave no incentive for average people to buy, and that's where the real money is in the masses, not from gouging a small number of devoted fans.

Oh and the point of a business model is to make money from your investment in your product, not to give away the product for free...

Repeat after me. Cost does not equal value.

"Mine was merely a reaction to the notion that "infinite" goods by themselves are essentially valueless..."

No, they are not 'valueless' and nobody said that they were. I believe that they said that the goods in question were cost-free. For instance, air does not cost you any money, but is very valuable.

Amazon frequently gives out free downloads. I downloaded eight tracks the other day. Some were not at all to my liking, two sounded pretty neat, and one of the crappy ones I burned to a disc for a friend of mine to listen to because they like that sort of music.

I am now more likely to purchase more music and/or otherwise search for more dealings with the two neat bands because of something that was free for me and had zero cost for Amazon. In addition, I'll probably recommend the good music along with my passing on of the weird song. So they've earned some of the best kind of advertising (word of mouth), and more business from me, and spent virtually nothing. Somehow, those free downloads are looking very vaulable now, huh? Both to myself and to Amazon.

Now, this is a small example of a company working a little bit of free into a business model that was great anyway. So why would a profit monster take a risk on this crazy new 'free' kick that those young whippersnappers keep going on about? Because free can work, if done right. Mike knows it and the guys at Amazon know it. Obviously it's not for everyone and it won't work 100% of the time, even when done correctly, but the same can be said for business models without 'free'.

"You really expect to much if you want artists to create groundbreaking business models that magically make them lots of money, while letting you get the content for free."

Oh, boy, you're just putting yourself out there, aren't you? Writers and painters and other artists seem to do just fine working day jobs and getting grants and practicing thier art as much as they can otherwise. Thier main concern is the creation of art, not the money to be made at it.

Throughout history, artists have created on the side or had patrons that owned the end product of what they produced. How much money do you think Da Vinci made from the Mona Lisa? Who gets the residuals from the Sistine Chapel? No one. Thier time was bought and paid for and the end result belongs to the owner, just like the end product of completed paperwork from a secretary's day.

Would it be nice to made megabucks doing what makes you happiest? Yep, but the same is true in any industry. I'd be ecstatic to make millions sitting in my pajamas designing websites and I bet Mike Masnick wouldn't turn down millions for blogging about topics that interest him. Does that mean that we should hold the world to blame for not thinking that our end products are worth millions?

I really don't understand the allure of treating a song-writer or a vocalist different from anyone else who puts in a days work. Can I sing like Mariah Carey? Nope, but Mariah Carey certainly can't code a website. Personally, I think the complaining artists are the ones that expect too much.

Re:

Thank you. It seems there are very few people who understand that. http://writing.borngraphics.com/voices.pdf --a few of the poems actually have been published. Lawson Inada for one thought that I should get the poetry published somehow. But that's not the point. Poets write poetry. The publication is a different matter.
--Glenn

What Kind of Book?

Dave Pogue is an author of computer user manuals. That is the important fact which everyone seems to miss. This inherently means that he is not the true author, in a meaningful sense. Microsoft or Apple, as the case may be, is the true author, and Pogue is merely a kind of ghostwriter. I have not read Pogue's manuals myself. However, over the years, I have read dozens of such books, and there are certain recurrent samenesses inherent in the genre. Of recent authors, I favor Alan Simpson's presentation. I tried one of those O'Reilly Annoyances books, but didn't much like it. However, for the most part, since the advent of the internet, I find it easier to go directly to the horse's mouth, the official technical documentation which is available for download from the applicable firms or organizations. For example, Intel has recognized that it is not worth their while to try to make money selling programming handbooks at a hundred or two hundred dollars a copy. They are in the business of selling chips, so they have the various manuals available for free download. I find, for me at least, that the ghostwriter tends to get in the way of understanding the material. He translates things into folksy English, and strips away the hard-edged precision of technical documentation. The single most useful book I bought back in the pre-internet era was Thom Hogan's _Programmer's PC Sourcebook_ (1988), five hundred pages of compiled tables, being such things as byte listings of headers, entry point descriptions, record formats, chip pinouts, etc. A worthy internet-based successor to Hogan is Ralf Brown's _Interrupt List_, available at various places on the internet.

About half of the contents of a user manual will be actual reproductions of material generated by the software: screen shots, terminal session printoffs, listings of configuration files, etc., and, I should add, rightly so. Half of the remainder will be lists of commands, options, etc., taken more or less verbatim from the official documentation, or in some cases, even from the source code comments. There will be almost nothing in the book which is not at least a paraphrase of material supplied by the software or hardware vendor. Originality is not a virtue for dictionary writers. Now, here's the problem-- there are lots of ghostwriters, all with much the same material to draw upon.

Questions

Here are the questions I have in mind:

1. What about other books? He mentions that he didn't get the expected number of tips from the book away he gave away for free. How have sales of his other books been affected? To reference another example not mentioned in the article - Saul Williams' Niggytardust album was given away for free but experienced a spike in demand (and profit) after an older record was used in a TV commercial. Have these books been linked in any way to leverage each other in a similar way?

2. How long has this experiment gone on for? God knows I download a lot of free (legal) mp3s where I've gone on to buy the full album, but sometimes not for over 6 months because I haven't gotten around to listening to them yet. Maybe people are going to pay after reading the book?

3. What other incentives were there to leave money other than "leave something if you enjoyed it"? Was there any incentive or reminder to revisit the site after reading the book?

4. Was the book actually any good? "Leave money if you enjoyed the book" only works if people actually enjoy it...

5. How does he consider his failure in terms of other authors who've done the same thing and succeeded - e.g. Cory Doctorow? What does he consider to be his failing since others have managed to give away content and make a profit successfully (and the example of Doctorow is not only more relevant but far better since he's hardly a household name for non-geeks)?

One final point:

"Oh Mr Freetard, you work as a programmer, do you? How interesting. So do you perform all your corporate programming duties for free, and earn your keep by selling personally branded mousemats on the side? "

No. Most programmers work for some kind of salary or under some kind of paid freelance contract. Those who give away their work for free (e.g. open source programmers) either get non-monetary compensation for their work or the software is created as part of an over-arcing strategy that encourages users to pay for other things (as per Red Hat, etc. - the software is free, support, service and access to certain types of update are paid for). Either way, no working programmer gives their code away for free and expects to have money magically appear without any extra effort.

Even though he is indeed going about taking on the free business model in entirely the wrong frame of mind and with entirely the wrong tactics, it occurs to me that Steven Poole has the same problem as a lot of authors; his infinite goods are the single most valuable thing he produces, and there aren't many scarce goods he can sell on the back of them. He can use the first in each trilogy as a loss leader but that's about the limit of his options, because smaller, more capable and cheaper portable computers are making eBooks a fair substitute for a paper copy; granted, there's a feel to a genuine printed book that mere stored data can never match, but I don't think I'm alone in being unwilling to pay $10 or more for it except in a few special cases, especially not in the middle of a recession.
I think we writers, published and otherwise, are all going to have to face up to the fact that the Internet has raised the bar a lot higher on how good we have to be before we can make so much money that we don't need a proper job any more.

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it occurs to me that Steven Poole has the same problem as a lot of authors; his infinite goods are the single most valuable thing he produces, and there aren't many scarce goods he can sell on the back of them.

Five years ago, musicians were saying the same thing. Now plenty of them are making more money than they could before.

The fact that the content is the most valuable part is still true -- but they have connected it to other scarce goods in a way that gets more people to pay.

To say that there aren't scarce goods an author can sell is simply incorrect.

He still has physical books to sell. He still has his *time* to sell. His ability to write *new* works. All of these are scarce goods, and all can be sold.

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I'm glad to see from the comment of MLS on May 23rd, 2008 @ 9:55pm that at least one person read what I wrote carefully, rather than hastily skimming and getting all indignant.
As for this:

You give away the infinite goods, not the scarce goods. Your time is a scarce good.

I have some information that you might find interesting: books take time to write. If someone gives away her book for free, she is necessarily also giving away for free the scarce good of her time spent writing it.

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There is no doubt that the time taken to write the book, the labour, is a scarce good.

The distribution, which is what is being discussed here is entirely another matter.

I am not willing to pay a lot for an ebook, regardless of an earlier comment in this thread because I know that the cost of duplication is, for all practical purposes, zero. In terms of this discussion it's an infinite good.

Should I read the work in digital form and find I like it enough the odds are very good that I'll want a hard copy. Scarce good. Preferably a hard cover book as opposed to cheap soft cover.

To me, that is the payoff for the writer, that I will want a higher quality version of the work that has incredible advantages over the digital copy.

As yet there isn't a digital technology that even begins to approach a printed book. I can't thumb through any known digital reproduction, write notes or comments in the margin, dog ear it so that I can flip back ever so quickly and so on.

That may mark me as somehow old fashioned but I don't care.

In the end, though, what the "free" offering may do is entice me to invest in a "scarce" offering of the same material, the book, in printed form because of the advantages and higher quality, in my mind, of the hard bound copy over any digital format I can think of.

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Err...Not quite. Because you only spend the time writing the book once, then you can give away (or sell) an infinite number of books without spending more time to write it. So time is a sunk cost into the creation of the book. You don't have to spend the time rewriting the book each time it's downloaded, so you're not really "giving away" your time each time it is downloaded.

Granted, it does take time and effort to be make the book, and he'd probably like to recover that at some point. Why doesn't he just acknowledge his cost and say: "Hey, for me to make any books in the future I need to recover the amount of time/money/xyz I put into the first book." Then put up a counter on the website that shows your total received donations and a little bar going towards $100,000 or whatever sum he decides he needs to make to make another book.

Basically have the community as a whole "commission" the next work via donations. Your time is a scarce good. So make them buy it?

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I have some information that you might find interesting: books take time to write. If someone gives away her book for free, she is necessarily also giving away for free the scarce good of her time spent writing it.

Steven, taking an insulting tone doesn't make you more correct.

As for the fact that books take time to write, who said we didn't know that or didn't agree to that. Yes, of course books take time to write, and that time is in fact a very scarce good. And that's why it's perfectly reasonable to build a business model based on selling that *time*. But that's not what you did.

I have pointed out repeatedly (and I find it amusing that you accuse me of not reading what you wrote, when you clearly did not read what I have written) that charging for one's scarce time IS a good business model. But that's not what you did. You set up a tip jar. That's not getting someone to pay for your time.

The book in digital form is infinite, your time is not. So why do you try to charge people for the infinite good and not your scarce good?

Unable to offer a reasoned argument, Poole resorts to condescension

Sorry Poole, but I've read BOTH posts. This one's unfailingly polite, and took the time to read carefully and make well-reasoned arguments. You're the rude one, and you're the one not doing your homework. You REFUSED to address the issues brought up here when a commenter pointed this post out on your site. This post actually offers the basis to work out a rational 'free-based' business model, while yours is just a condescending, hateful mess.

And my, Poole, an awful lot of ITALICS in your comment. Someone's feeling pretty insecure. Of course, a simple mea culpa could resolve all that, but you're simply not up to it. Why admit you're not up to the game, when it's so much easier to kick the table over?

I understand the artist side of things. They want to make money on the actual art they create, not added merchandise (like t-shirts, concert tickets, etc...). But, the problem is that in this day and age of digital freedom, they need to look to those options to make money. It isn't that it is the right thing, but it is what needs to be done. THey can try to fight it, do what they can to protect their media, but somehow it will get out there and it will be stolen. My thought is you immediately offer your music, art, etc... for free, and market other materials with it that can be purchased. I know, not the ideal solution, but one has to wonder if the digital theft will ever be solved. I am sure artists feel horrible about all of this. Think of the time a band spends writing and recording an album, then to only be faced with the option of giving it away for free, hoping people buy a t-shirt too.

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First of all, without the original art, the T-Shirts, Concert Tickets, and all the other odds and sodds wouldn't exist. Therefore, they are making money directly off from thier art. I've talked to artists, mostly up and coming, but a few established, and most don't seem to mind that thier work can be gotten for free. Take musicians for example. For up and comers, they don't make squat off from thier record sales, but generate most of thier income from performances. For them, the internet is simply the best form of advertisement. Because of the free distribution of thier work more people are exposed to thier art and therefore more come to enjoy it and pay to see them perform. Now let's take books. Everybody I personally know prefers to get a physical copy of a book. Why? Cause it's portable and cheap. Comps are nowhere near as portable or cheap. Neither are the readers. I can buy a bum load of printed books for the price of a reader. Therefore, yes I read some online. But the ones I like, the ones that have value to me, I go and buy so that I can take them with me when I travel. Would they make more if I had to pay for the online experience? No, because I would simply ignore them and go find people who are willing to let me sample before I buy. After all, you don't buy a chair without sitting in it first.

the tip jar IS a valid business model.

Mike, you are wrong. The tip jar is a totally legit business model. How else do you capture money from those for whom the value of the product is near zero? That is MOST OF YOUR POTENTIAL CUSTOMERS. Think about it.

You just have to use it to price discriminate.

The tip jar gets those willing to pay least. If we stick to it and create a CULTURE of tipping, then it will get even more of those willing to pay least.

The 'official downloadable product' at your asking price gets you those willing to pay more.

Still sell the physical product. That will get you those willing to pay even more for a possibly more convenient offline option.

Sell deluxe or signed editions. That will get you those willing to pay top dollar for collectibles.

What has piracy got to do with any of this? Those who pirate have just been priced out of your product by your inept business models, and they are using the means at their disposal to acquire the product at a cost which is most commensurate with the value. By providing an alternative, you can recapture them. But you have to make it easy to tip only just a wee tiny little bit. If I am going to tip $0.50 then it had better be with one click or else I am bored already.

The tip jar. That is how you capture the all the pirates.

We tip a bellhop, a barkeep, waitress, live entertainer--why not a media author? Really, why not? Merely a cultural difference.

But in the future, authors are going to NEED tips to survive--there is no other way--and they had better get with the program to create a culture where that is reasonably expected.

Re: the tip jar IS a valid business model.

Indeed, I would like to point out, what does it cost you to put up a tip jar? Nothing! Whether or not you change the way you distribute your media, put it up anyway!

Wait for someone to find your manual totally useful in a pinch and then tip you a few bucks for being useful.

Wait for someone to use your $500 software which they pirated in a totally cool way, and feel a little guilty, and then WHAM right on your homepage they can tip you $10 guilt free.

Wait for someone who just pirated your music (because it is easier to get all my music from one place: easynews) to listen to it in a dark room and be totally zapped by the genius, and run over to the website to throw in a couple of bucks.

I never do any of this, because nobody has a tip jar. So I can't guilt trip any of my friends and family, and I can't do the grassroots effort to create a culture of tipping quid pro quo. But by god, I wish I could.

@ John Wilson: yes, driving sales of the physical book is one of the many upsides of giving away free e-copies that I wrote about in my post, not mentioned by OP here of course. The point I then made is that if e-distribution becomes the norm for all books (through some magic e-device that is somehow "as good as" a physical book for most people), that is no longer an upside.

On the other hand, I'm intrigued to know why, if the amount you are willing to pay for something is predicated on the cost of distribution, ie zero for an ebook, you are nonetheless willing to pay a lot more than the cost of production and distribution for a nice hardcover book.

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And that failure to understand is what is, ultimately, causing your failure to generate income off the models being suggested. It's really quite simple. People like to have limited and one of a kind items. Something the Jones's next door don't have yet, and they are willing to pay a lot of money for these items. So, anybody can get a copy of the book online for free, but me, I got a hardcover with an extra short story, one with an autographed photo, and one with an extended intro dealing with the creation of the work. I had to pay not only the going price for the book, say $10.00, but an extra amount for all those special one of a kind or limited extras, bumping the price up to say $15.00 a book. If you can't understand the economics in that then you have no business being in business.

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@Stephen P

"I'm intrigued to know why, if the amount you are willing to pay for something is predicated on the cost of distribution, ie zero for an ebook, you are nonetheless willing to pay a lot more than the cost of production and distribution for a nice hardcover book."

It's nothing to do with the price of distribution, but about the cost of getting the same thing by other means - and in 'cost' I include monetary cost, and the cost in terms of time and hassle.

When I think how much it would cost me in materials and effort to print a novel-length book and bind it in an acceptable format, I soon decide that the alternative - paying full price for a mass-produced hardback - is preferable.

For now, that's an advantage writers have over musicians and filmmakers - because not only is it cheaper to Bittorrent music, but it's more convenient than buying a CD or a legal download. That's information wanting to be free.

Let's not forget that when Stewart Brand coined the phrase 'Information wants to be free', the very next line was 'Information wants to be expensive'. 'That tension will not go away', he wrote in 1987...

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John P: It's nothing to do with the price of distribution, but about the cost of getting the same thing by other means - and in 'cost' I include monetary cost, and the cost in terms of time and hassle.

So based on your analysis, it seems that the current model has become inverted, where possibly too much value is put on production, promotion and distribution, and not enough value is placed on the artist/writer's ability to create..?

If so, it could seem that a model that devaluates production, and encourages artist/writer creation (Using digital delivery), could be seen as a direct challenge to the business model's ability to control rights to sell plastic encoded with a specific performance. Therefore artifically constraining the artist, while increasing the value of live performances.

Possibly not true with Writers. But overall, is this a valid assumption?

Somebody's got to pay - but how?

Just because something is free to download doesn't mean it's free to use. There is no such thing as free puppies the saying goes. If there is no way to make money on something it has no value so you should do something else.

Mike, I didn't "try to charge" anyone for anything: this is what you are, curiously, continuing to misunderstand about my post. If I had wanted to try to charge for the book, I would have required payment before download. For some reason you decided to interpret my post in a paranoid way, reading inventively between the lines to conclude that I didn't really give away the book for free. Well, yes, I did really give away the book for free. I added the tip jar purely as an extra experiment. You are getting angry about some imagined attack on your entire economic ideology, when all I did was say that soliciting voluntary donations on the back of a free download didn't make me much money — although, as I stressed, the experiment was very positive in other ways. Since we both agree that that particular business model doesn't work, I continue to have trouble understanding why you attempted such a condescendingly hostile tone in your post above.

Meanwhile, your alternative business models seem to me lacking in detail so far. How exactly, please, can an author give away a book and yet still charge people for her time in writing it? (I'm assuming we are not talking about the minority of books that are reprints of previously commissioned articles etc.)

By the way, you missed out an inconvenient fact about the Nine Inch Nails example: as I pointed out, they charged $5 for what you would call the "infinite" good of the lossless electronic files of Ghosts, and a lot of people bought them.

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Steven,

Don't worry about Mikebob and the Mikettes here at slashdot lite. Mikebob continues to flog his ideology while trying not to be specific enough to be contradicted. He tends to make grand sweeping statements and then just say the same thing over and over again until you tire of it. The few times I've caught him making specific comments they were just ridiculous. His arguments have false premises and unsound logic.

To prove his point, all Mikebob had to do was give you a specific suggestion rather then go off with his nonsensical infinite/free argument, which is actually abundance/low cost. It would be interesting to see what the increase in bandwidth on your site cost you.

Since you obviously are someone in the business willing to take risk, it would be interesting to see how an ad supported version of the book would do. It would also be interesting to find out how many of the people who downloaded the pdf actually read it. One way to find out would be to put a coupon in the pdf for a dollar off the book or even you next book.

Anyway, thanks for the post it was enlightened and well reasoned, a real breath of fresh air.

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Then why did you get upset that people didn't pay? I guess that's where you lost me.

If I had wanted to try to charge for the book, I would have required payment before download.

Again, then why did you get upset that no one pay and go on to insult anyone who has an argument in favor of using free as part of the economic model?

You are getting angry about some imagined attack on your entire economic ideology,

I dunno why. I'm sure by calling people "freetards" and calling a detailed explanation "high-falutin' idealism" you only meant that you examined those ideas at an intellectual level. How could I have possibly imagined that to be an attack on the economics I explained (note, also, it's not an "ideology" -- it's just an explanation of basic economics)?

Sorry to have misinterpreted you so completely, but I think your language may have had something to do with it.

Since we both agree that that particular business model doesn't work, I continue to have trouble understanding why you attempted such a condescendingly hostile tone in your post above.

Compare the two posts. Who used terms like "freetard" and dismissed serious economic arguments as "high falutin idealism"? Who was more condescending?

Meanwhile, your alternative business models seem to me lacking in detail so far. How exactly, please, can an author give away a book and yet still charge people for her time in writing it?

You don't charge for the time after writing it, but before. That's when the content is still scarce. You can still charge for any scarce good: which includes the physical books (and multiple experiments have shown giving away the ebook increases sales of the physical book), it includes getting someone else to pay you for writing the new book, it includes getting the opportunity to write in other formats (columns and the like) it includes speaking engagements.

Now, before you respond and say all of those things don't pay squat -- that's mostly true, today. However, if more convenient business models were put in place, including systems like ArtistShare where you get fans to pay you upfront for creating the new works in exchange for specific benefits and access, then you will want more people to have your older works to get more people involved in paying you for you to create future works.

And there are other business models for those who don't like that one:

* You could give away the basic content for free, but then charge for a "special edition" book that has certain extra features that are worth paying for.
* You could subsidize the download with ads (Chris Anderson is doing this with his new book).
* You could offer your biggest fans access to an exclusive discussion list for a fee (the list being a scarce good).
* You could offer benefits to those who buy the physical book (a coupon in the sleeve that gets you a discount on an older work or access to a reading or whatever).

The point is that there are many different business models, but the focus has to be on giving people a relevant *reason* to pay other than "I need to earn a living!" You have to provide scarce value that is set up in a way that people don't mind paying.

By the way, you missed out an inconvenient fact about the Nine Inch Nails example: as I pointed out, they charged $5 for what you would call the "infinite" good of the lossless electronic files of Ghosts, and a lot of people bought them.

Not quite. Reznor put all of the tracks under a CC-sharealike license, meaning they were all available on file sharing programs quite quickly (in fact, Reznor admitted he put them up himself). He did offer the $5 model as an option for those who wanted to support him, but he also gave fans a *reason* to want to buy that (by including other extras as well). He also included all of those other tiers, most of which were tied to scarce goods -- and that's where he made the majority of his cash. The fact that some people will pay for purely infinite goods is no surprise (even you discovered that). But relying solely on that won't pay the bills (as you discovered).

Basically, he offered different types of people many good reasons to pay -- beyond just "hey, I need the money."

Besides, the Ghosts example was a lot less interesting than his even more recent example where he gave away all of the tracks completely free -- but tied it to an announcement of concerts.

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You're finally revealing yourself, Mike.

"The point is that there are many different business models, but the focus has to be on giving people a relevant *reason* to pay other than "I need to earn a living!" You have to provide scarce value that is set up in a way that people don't mind paying."

So, according to you, the need to earn a living is not reason enough. Well, I never. It's beyond me why you insist that everyone should adopt the free model simply because it works for the line of business you are in.

The most relevant reason an artist can offer, and that's what they have been doing all along, is: "I'm entertaining you, making sure you had a good time, please pay." Why is that unacceptable to you? Why do you assume that people will mind paying for content?

Or are you saying that people won't pay because they can get it for free because they've no problems with digital shoplifting? Since the Internet has all but legitmized the unauthorized publishing of content, no one wants to pay?

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If he's not, then why does he keep arguing for the free model when it isn't clear whether it will work for certain sections? Clearly he wants everyone to follow his lead, whether its suits them or not.

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Mike is stating an economic reality: if something is available in digital format then the natural price of that good tends to zero.

This is only the case if you assume there are no intellectual property rights, which more or less makes a nonsense of the entire concept of a market. Markets in physical property can only function when there are physical property rights, and in the same way, markets in intellectual property can only function when there are intellectual property rights.

If you say that everyone can grab whatever they'd like, then it should be self evident that nobody will be willing to pay for anything.

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This is only the case if you assume there are no intellectual property rights, which more or less makes a nonsense of the entire concept of a market.

There are two things wrong with this statement.

First, it is not only the case without IP rights. It is still the case even if IP rights are in place, but some content producers *choose* to ignore those IP rights and to give away their content for free. If they adopt reasonable business models and start making more money from those business models more customers will flock to them, and those who insist on using old business models will find it even tougher to survive. That's got nothing to do with assuming IP rights are in place. It's assuming the economic reality that your competitors will figure out how to use MC = P to their advantage.

The second thing that is totally wrong about the statement is the idea that assuming no IP rights goes against the concept of a market. Not so at all. In fact, I'd argue that IP rights make a mockery of the concept of a market. That's because the whole point between property rights and markets are to allow for the efficient allocation of scarce resources. That's the entire point of trade. However, if you have an abundant resource, then there's no question of how you allocate it efficiently, because everyone can have as much of it as they want. There is no *need* for a market. That's why you don't have a market for air. It's abundant.

Markets in physical property can only function when there are physical property rights, and in the same way, markets in intellectual property can only function when there are intellectual property rights.

But you're assuming that there's a need for a market in IP when there is none.

If you say that everyone can grab whatever they'd like, then it should be self evident that nobody will be willing to pay for anything.

And again this is false. You still are willing to pay for scarce goods, and the infinite goods can easily be attached to scarce goods.

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First, it is not only the case without IP rights. It is still the case even if IP rights are in place, but some content producers *choose* to ignore those IP rights and to give away their content for free. If they adopt reasonable business models and start making more money from those business models more customers will flock to them, and those who insist on using old business models will find it even tougher to survive. That's got nothing to do with assuming IP rights are in place. It's assuming the economic reality that your competitors will figure out how to use MC = P to their advantage.

You're clearly confusing two entirely different things. One is the situation under perfect competition where the market price is equal to the marginal cost, and the other is the optimal price of a good/service that is subsidised by a complementary good/service, which essentially requires imperfect competition.

In general, perfect competition is a theoretical concept, which doesn't exist in the real world, or even much in theory outside of undergradate economics. There are a few markets that come close to it in some ways, e.g. agriculture, but information goods certainly do not. Books, films, software, music, et al are highly differentiated goods for a start. Moreover, not only is perfect competition a completely unrealistic assumption, most industrial economists would argue that it isn't even a desirable situation, because when price equals marginal cost, there is no incentive to invest, so the static gain in welfare in one period is more than offset by the intertemporal welfare loss.

Leaving aside the irrelevant notion of perfect competition, there is nothing natural about the price of a subsidised complementary good/service being equal to marginal cost. A subsidised product may indeed be sold above, at or even below marginal cost (including being given away when there is a positive marginal cost). Information goods are certainly not unique in being profitable when sold at or below marginal cost because of the effects on demand for complementary goods/services. However, such cases are exceptions to the general rule, both for information goods and physical goods/services.

The second thing that is totally wrong about the statement is the idea that assuming no IP rights goes against the concept of a market. Not so at all. In fact, I'd argue that IP rights make a mockery of the concept of a market. That's because the whole point between property rights and markets are to allow for the efficient allocation of scarce resources. That's the entire point of trade. However, if you have an abundant resource, then there's no question of how you allocate it efficiently, because everyone can have as much of it as they want. There is no *need* for a market. That's why you don't have a market for air. It's abundant.

You seem to be stuck in a static mindset, when reality is dynamic. Intellectual property doesn't just appear out of thin air, it is the product of investment. The point of intellectual property rights, and hence a market, is to lead to optimal allocation of this investment, and hence to optimal quantities of IP production. It is widely accepted in economics that the absence of IP rights leads to underproduction of IP, even if the situation with IP is only a second-best rather than a first-best outcome (but a situation without IP rights isn't even a second-best outcome). At the same time, IP rights lead to underprovision, so there is a need for balance, eg IP rights should be limited in scope and time (and the same applies to physical property rights).

But you're assuming that there's a need for a market in IP when there is none.

This is certainly an unorthodox point of view. To clarify, is it your view that the abolition of intellectual property rights is compatible with a market for information goods, or that there is no need for such a market in the first place?

And again this is false. You still are willing to pay for scarce goods, and the infinite goods can easily be attached to scarce goods.

Do give some examples. Mind you, since you're arguing that IP rights aren't necessary, you naturally can't include goods or services that derive their value, in whole or in part, from IP concepts such as patents, trademarks and so on.

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The only piece I can comment on is:

since you're arguing that IP rights aren't necessary, you naturally can't include goods or services that derive their value, in whole or in part, from IP concepts such as patents, trademarks and so on.

No. We're not advocating a world without IP. Additionally, we're not advocating a world which artists are not paid.

However, we're merely suggesting allocation of marketing resources to better fit a certain market segment which can benefit from "free", and you could benefit from solid, high-bandwidth face-to-face marketing.

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You're clearly confusing two entirely different things.

No, I'm not confusing two separate things. I'm explaining economic principles that touch on a variety of factors.

One is the situation under perfect competition where the market price is equal to the marginal cost, and the other is the optimal price of a good/service that is subsidised by a complementary good/service, which essentially requires imperfect competition.

Actually, I understand that quite well. The presentation I gave just last Thursday in Toronto made exactly that point. That the way you profit is to avoid situations of perfect competition, and the way you do that is either by innovating or offering something that simply cannot be copied.

But the point that I'm making is that if you use the fact that MC = 0 to your advantage, you can combine both of those concepts to be better off. And, if you ignore it, you're going to be in trouble when others make that change for you.

In general, perfect competition is a theoretical concept, which doesn't exist in the real world, or even much in theory outside of undergradate economics. There are a few markets that come close to it in some ways, e.g. agriculture, but information goods certainly do not.

I would disagree with you on the point about information goods.

Moreover, not only is perfect competition a completely unrealistic assumption, most industrial economists would argue that it isn't even a desirable situation, because when price equals marginal cost, there is no incentive to invest, so the static gain in welfare in one period is more than offset by the intertemporal welfare loss.

First of all, it's not an unrealistic assumption. We see it happening all the time.

Second, while there may be some industrial economists who argue against perfect competition, that (again) is not my point. My point is to find situations where you can avoid perfect competition in those complementary goods -- and you do that by attaching those infinite goods to scarce goods that cannot easily be copied.

So I'm in agreement with your industrial economists. I'm just explaining the more efficient way of getting there.

Leaving aside the irrelevant notion of perfect competition, there is nothing natural about the price of a subsidised complementary good/service being equal to marginal cost. A subsidised product may indeed be sold above, at or even below marginal cost (including being given away when there is a positive marginal cost). Information goods are certainly not unique in being profitable when sold at or below marginal cost because of the effects on demand for complementary goods/services. However, such cases are exceptions to the general rule, both for information goods and physical goods/services.

Indeed. I'm not sure what you're arguing here because you're basically agreeing with me -- other than the last sentence about it being "exceptions to the general rule." That's simply untrue. It is the rule. There are very few exceptions.

You seem to be stuck in a static mindset, when reality is dynamic.

Actually, I'd argue the reverse. You seem to be set in a static mindset that the only incentive is IP, and that you don't have a dynamic market of complementary goods based on that IP.

Intellectual property doesn't just appear out of thin air, it is the product of investment.

Indeed. Driven by the demand and paid for by the sale of the complementary goods. Just as it always has been. Throughout history.

Where's the need for IP, except to distort that market?

The point of intellectual property rights, and hence a market, is to lead to optimal allocation of this investment, and hence to optimal quantities of IP production. It is widely accepted in economics that the absence of IP rights leads to underproduction of IP, even if the situation with IP is only a second-best rather than a first-best outcome (but a situation without IP rights isn't even a second-best outcome). At the same time, IP rights lead to underprovision, so there is a need for balance, eg IP rights should be limited in scope and time (and the same applies to physical property rights).

"Widely accepted?" I'm sitting next to stacks of economic research that says otherwise. Most of it makes the rather straightforward point: creating artificial monopolies distorts the market for IP in very inefficient ways.

Can you explain how gov't granted monopolies leads to a more efficient outcome? And which economists believe that?

This is certainly an unorthodox point of view. To clarify, is it your view that the abolition of intellectual property rights is compatible with a market for information goods, or that there is no need for such a market in the first place?

There is no need for such a market in the first place.

Do give some examples. Mind you, since you're arguing that IP rights aren't necessary, you naturally can't include goods or services that derive their value, in whole or in part, from IP concepts such as patents, trademarks and so on.

Um, don't be ridiculous. Since IP rights do exist, most everyone takes advantage of them, simply because they're there. So limiting what can be included only to things not using IP laws is a false limit (besides, as I've explained repeatedly, trademark is not IP -- it's consumer protection).

But the point stands. People pay for scarce goods. They buy the book (scarce) because of the value of the content -- but they're not buying the content. They buy the movie seats (scarce) because of the value of the movie -- but they're not buying the movie.

People inherently know to pay for scarce goods. But they have trouble paying for infinite goods. That's part of the reason *why* piracy is so rampant. Inherently most people don't see it as wrong because they know no scarce good is being used up.

Re: Re: Re: Re: Re: Re: Re: Re:

the whole point between property rights and markets are to allow for the efficient allocation of scarce resources. That's the entire point of trade. However, if you have an abundant resource, then there's no question of how you allocate it efficiently, because everyone can have as much of it as they want. There is no *need* for a market. That's why you don't have a market for air. It's abundant.

If you read a letter that Thomas Jefferson wrote on the subject of patents, you'll see that the Founders had these types of thoughts -- even if not the same economic language.

One of the things Jefferson explained was that property was a sort of social invention. Its purpose is to prevent continual fighting over goods that two (groups of) people can't both fully possess -- like a specific house. (In the language of economics, we would call these scarce goods.) The "invention" called property prevents conflict by having Government assign and enforce possession.

By contrast, since many people can possess the same idea at the same time without coming into conflict, there is no need for Government to step in and create any sort of "property" in ideas. (Ideas here would refer to the subject of patents, but the reasoning transfers 100% to expressions).

Thus, patents (and copyrights) are not deeds. They are an optional incentive mechanism to get authors and inventors to work harder on behalf of the public. It is not an accident that the Constitution says that copyrights and patents can last only for limited Times. The problem of funding the creation of abundant goods should only be of interest to the Government to the extent that the public can expect a decent overall return on its investment.

Re: Re: Re: Re: Re:

Re: Re: Re:

The most relevant reason an artist can offer, and that's what they have been doing all along, is: "I'm entertaining you, making sure you had a good time, please pay."

That reason is relevant to the artist. He needs to find a reason that is relevant to the consumer. Such a reason would be, as with any economic transaction, "I will offer you this thing that you cannot get otherwise in exchange for some of your money." The trick is figuring out what that thing is. I'm not a business expert but it looks some people are able to figure this out, and I expect more and more people to do it successfully.

Why is that unacceptable to you? Why do you assume that people will mind paying for content?

It's perfectly acceptable and no one has said otherwise. The point that is being made (and made, and made, over and over again) is that it will not generally result in a viable business model by itself. Most people not being willing to pay much or any money for infinite goods is not an assumption, it's an observation. We don't have to wonder whether they'll pay, we can see that they (generally) will not. Again, will some pay? Yes. Enough to make a profit on what you're doing? Probably not.

People keep getting hung up on how things ought to be. Planning your business around the way you think things ought to be is a great way to fail, while the ones making businesses based on the way things actually are, are the ones making money. Do you want to complain about your rights being violated and how immoral all your fans are until you go out of business, or do you want to make money? Note that this argument doesn't make any claim that your fans are not immoral, but acknowledges that that question is not relevant to the economic reality an artist faces today.

Re: Re: Re: Re:

Hi Nasch

Thanks for your comments. I really like the way you call a spade a spade. And that's exactly what my gripe with Mike is. Instead of clearly saying piracy is at the root of the need to change the traditional business model, he keeps tapdancing around the issue with terms like basic economics, infinite goods and the like. Simply put, piracy is here to stay. You can't do shite about it. Get real, get a better model.

But I've also argued that the worst hit are musicians and the newspaper people. Authors don't seem to be under threat simply because people still prefer to read the printed word. They're willing to pay good money for it. Why on earth should they consider a "give it away free model"? See, the free model doesn't work for everyone. Mike seems loath to accept that.

In an earlie discussion with Mike, I even came up with a business model, which he told me has already been adopted by Maria Schneider. So, contrary to what you think, my head's not in the sand. Come on man, I am not a music company CEO; I'm very much clued in to what's happening in the real world.

I want the artists to make money; I'm all for cutting out the RIAA and other distributors; I love the Internet and I'm also acutely aware that piracy has changed the game.

Re: Re: Re: Re: Re: Re: Re:

MLS, I'm confused why you continue to insist this is a moral crusade, when you didn't respond to my simple question in a different thread:

If you have these two situations:

(1) No one gets anything for free, but a much smaller group gets to consume content, and the creator of that content makes much less money.

and

(2) Lots of people get stuff for free, which creates a much bigger group of people who consume the content, and even though only a small percentage of that group pays any money, the creator of the content ends up making much more money.

Where is the moral question. You're insisting that situation 2 is somehow less moral, when all I see is a case where everyone wins. Situation 1 is a case where everyone is worse off, and you're claiming that's more moral?

My point is that morality doesn't need to come into play if everyone is better off.

Re: Re: Re: Re: Re:

Mike's point has to do with competition, not piracy. If you're a mucician who's model is, "you can't have my music unless you pay me first," you're creating barriers to people hearing you and becoming fans. Against a competitor who's model is, "take my music for free, and give it to your friends," his fan base will grow significantly more and faster than yours. This alone doesn't do anything itself, but all artists eventually monetize their fans: fans are the ones who buy your CDs, after all. If they have a bigger fan base, and they will, they can make more money. Mike's point is that if you don't find a model that takes advantage of the infinite good someone else will and you'll lose.

If anything, Piracy is merely a harbinger; in the future there will be no piracy because there will be nothing for piorates to offer that's better than the actual product. You can't pirate concert tickets. You can't pirate the artist's time.

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So, according to you, the need to earn a living is not reason enough. Well, I never. It's beyond me why you insist that everyone should adopt the free model simply because it works for the line of business you are in.

Huh? It's got nothing to do with because it works in the line of business I'm in. It has to do with the basic economic realities. You can keep denying it, but it doesn't change things.

The most relevant reason an artist can offer, and that's what they have been doing all along, is: "I'm entertaining you, making sure you had a good time, please pay." Why is that unacceptable to you? Why do you assume that people will mind paying for content?

Because it's an economic reality. If everyone else figures out how to give that content away for free, and you're still charging, how well is that going to work?

If everyone else is selling automobiles and you're still trying to sell horse and buggies, how well is that going to work? You say "but horse and buggies have value," and I point out that automobiles have more value.

That's economic reality.

Or are you saying that people won't pay because they can get it for free because they've no problems with digital shoplifting?

No. I'm saying other creators will figure out this business model, and those that don't will be left behind. Trust me, it's much better to be ahead of this curve than behind it.

Some will say that those behind can catch up after it's proven, but history has shown that's a lot more difficult.

Another problem

It occurs to me there's another problem the Internet makes for all artists that's bound up in the problem of avoiding obscurity.

With such easy direct access to the best the world has to offer every product available online is in direct competition with the best of their field.

It's a problem that means whether or not your basic business plan is sound it has the additional hurdle of competing with the very best product in your field, Geography and media distribution no longer separating competitiors.

This problem will cause diappointment for some who would once have an opportunity now lost to them.

Re: Another problem

t's a problem that means whether or not your basic business plan is sound it has the additional hurdle of competing with the very best product in your field, Geography and media distribution no longer separating competitiors.

This problem will cause diappointment for some who would once have an opportunity now lost to them.

But keep in mind that for every artist who fails because their work isn't good enough to succeed on the world stage, their could be another who is excellent but would never have gotten any exposure outside their village without the internet.

Re: Another problem

No, I don't think so. Some people who might've made more money in the old world could make less, but most people will benefit from the extra exposure. Yeah, you may be competing with the 'best' in the field, but especially when you're talking about art 'best' is a subjective term. The long tail promises that even fringe artists will find a following on the Internet. In the end, more people will be making more money in the new world than they would have in the old world, even if they're making less than the 'stars' used to.

what a confusing post. did you really study economics because it isn't at all clear from your post that you have much mastery of the subject. you do go out of your way to poke the NYT but i'm not interested in your personal swipes. it's the absence of any analysis to back up your contentions that's really disappointing here. all i read are unsupported 30,000 foot generalizations. perhaps there is a workable business model argument but you fail to make it

Pure economic physics

Right on Mike,
Pure econmic physics...very fundanmental. Value and content (light, water), will seek it's own level. It is the availability of and ease of access to such value and content that merly facilitate the inevitable (physics). As long as desire, thurst, useage, imagination, spontinaity, capitalism, scams, honest, dishonest, useful, wasteful and so on make up human demand (economics), nothing, nothing at all will prevent these forces...nothing, so let it go, as you so eloquently point out(as I read it), free is only a small part of a much bigger picture , not the picture.

As for theft, aside from the DVD/Cd farms, again thoes who can derive large gain by sophisticated, illeagal, global,government tolerated/sponsored activities, will not be denined...economic physics.

When will this pop economics go away?

I wrote a lot on this 'free' pop economics already, but I guess I need to write more.

Marginal cost of zero will make the price zero?

First, there is no such thing as zero marginal cost in reality. Do you really believe that a digital file copies itself? You don't need any person, computer, connection, electricity, and so on? Just look beyond the 'material cost' which is such a primitive point of view. Actually, in most businesses material is not the main cost. The human is.

Second, let's 'assume' the costs get close to zero. Does it mean price will naturally become zero (i.e. the marginal cost)? Not necessarily. Does Nike sell sneakers at marginal costs? They could sell at marginal costs, and make profits somewhere else like sporting events. But what really happens? The opposite. Why? Because they 'can' make money more directly by adding margin to the goods. One enabling factor is their control of the piracy, which exist, much better than the digital contents industry.

There will be more 'priced' digital contents that sell well, as we figure out a better way to control piracy. Do you want to bet? (Don't say that piracy should not be blocked, as I cannot bet on it then.)

Re: When will this pop economics go away?

"First, there is no such thing as zero marginal cost in reality."

Not literally zero, granted, but near enough. For example, I pay annually for a web hosting account with 5 terabytes of free bandwidth included as well as plenty of disk space. If I were to use that to sell copies of an 80Mb MP3 album, I would not have to spend any more overhead to sell 50,000 copies than I would on selling 100 - I'd still be under my transfer limit and all costs would be contained in my hosting account's billing.

Obviously, costs of a physical album would go up exponentially if I were to press those to CD instead. With the digital good, the costs remain pretty much static once I've prepared the site and files to be transferred. So, the cost of each unit is virtually zero.

"Does Nike sell sneakers at marginal costs? "

No, but that's where the "scarce" element rather than "infinite" element comes in. Nike have built a brand name and reputation. When you buy a Nike shoe, part of the price includes that. Nike can sell shoes at a higher price because people are willing to pay for that.

Many competing shoes are sold at much closer to their marginal cost because they don't have that same brand and reputation to build on. Nike are still vulnerable to piracy - cheap Chinese knock-offs, etc. - but they have a market that's willing to pay extra for the real thing.

This is what we're talking about here - giving people a reason to pay for the product. If they don't have a reason to buy the product at a price that's higher than marginal cost, you have to either give them a reason to do so, or leverage the product to get the customer to buy something else. Because the marginal cost is almost zero in the case of digital goods, and because the goods can be copied infinitely, it's often better to use the digital good to leverage another market.

Re: Re: When will this pop economics go away?

No, but that's where the "scarce" element rather than "infinite" element comes in. Nike have built a brand name and reputation. When you buy a Nike shoe, part of the price includes that. Nike can sell shoes at a higher price because people are willing to pay for that.

So do authors, artists, etc, and that's what people who buy music are actually paying for (not the bits, which have a marginal cost approaching zero). In other words, what you've said applies in almost exactly the same way to creative works. The only difference is that in the latter case, the marginal cost is much lower, as is the initial investment needed to duplicate the goods (ie a PC costs a lot less than a manufacturing plant).

As with music, books, etc, the bulk of the price of a pair of Nike trainers covers intellectual property, not marginal production costs. Without intellectual property laws, anyone could use the Nike brand, logo, etc, and so there would be no reason to create or develop it in the first place. This sort of thing has been tried, eg in the former Soviet bloc, and consumers were not at all pleased with the resulting unbranded rubbish that was produced.

Re: When will this pop economics go away?

First, there is no such thing as zero marginal cost in reality. Do you really believe that a digital file copies itself? You don't need any person, computer, connection, electricity, and so on?

And which of those are marginal and which are fixed? You seem to be confusing fixed costs with marginal in most of those cases...

Second, let's 'assume' the costs get close to zero. Does it mean price will naturally become zero (i.e. the marginal cost)? Not necessarily. Does Nike sell sneakers at marginal costs? They could sell at marginal costs, and make profits somewhere else like sporting events. But what really happens? The opposite. Why? Because they 'can' make money more directly by adding margin to the goods.

This actually supports my point: Nike charges above the marginal cost by innovating and differentiating in ways that are not easily copied. *That's* the point. To charge above marginal cost you need to differentiate in a scarce way. Nike does that with its quality and with its brand.

This was the topic on which I just gave a talk a few days ago on in Toronto -- explaining how you differentiate with digital goods to be able to charge above marginal cost on scarce goods.

There will be more 'priced' digital contents that sell well, as we figure out a better way to control piracy. Do you want to bet?

Amazing

It's simply jaw-droppingly astonishing to me how many well-educated people cannot seem to grasp the basic economic forces behind zero-marginal cost duplication and distribution. This is not an argument about morality or law in any way. It is a basic economic reality that isn't affected by laws or concerns for the content producer.

That being said, this is one of the best explainations of the new digital economy and how business models need to change that I've ever read. Nicely done, and I hope more content producers will read and understand your points here, for their own sake.

In essence...

I finally get it! Once a "non-digital" good goes "digital" nobody should ever have to pay for obtaining a "digital" copy. What the creator of what is now a "digital" good should do is use that "digital" good as a form of advertising so that they can realize an income stream (i.e., earn a livelihood) from selling "non-digital" stuff. Moreover, the foregoing rule holds true even if the original "non-digital" good is converted into "digital" form and distributed to the masses by someone who does so against the express wishes of the original creator.

As a corollary to the above, any creator of an original work (e.g., music) who would like to meet customer preferences by "selling" the work in "digital" form simply does not see the big picture if he/she would like to use any form of copy protection.

If the above are scrupulously observed by the creators of such works they will thusly be incentivized to create even more original works. Importantly, copyright law does not provide any such incentive and should be discarded an inimicable to social progress.

Re: In essence...

It's a shame you're totally wrong, of course, and I'm not sure why you're still trolling this thread...

Anyway:

"Once a "non-digital" good goes "digital" nobody should ever have to pay for obtaining a "digital" copy. "

I don't recall anybody saying that. What I do recall being said is that the market value of any good will approach marginal cost, and that the marginal cost of said product in a digital form is practically zero. Since people recognise that a digital file costs relatively nothing to reproduce compared to the physical copy, they consider it to be worth less. People are much less willing to pay $15 for an MP3 album than they are for a CD, and market prices are going down accordingly.

"As a corollary to the above, any creator of an original work (e.g., music) who would like to meet customer preferences by "selling" the work in "digital" form simply does not see the big picture if he/she would like to use any form of copy protection."

"Copy protection" means DRM. DRM makes goods less useful by restricting how and where they can be used, therefore reducing the amount people are willing to pay for it (less useful = less valuable). In addition this makes free, pirated, goods more valuable than the real thing.

Example: I own a Creative Zen player. I can play any unprotected music file on that player including any obtained through pirate networks if I wish as well as legally obtained tracks. I cannot, however, play music that's downloaded through iTunes if it's DRMed. I would like to pay for the music, and if a non-DRM option is available then I will do so. If not, then I am forced to buy a CD and rip it, or pirate the music if I can;'t buy the CD for some reason (e.g. exclusive tracks, CD not available in my country).

So, in this case an unprotected album will get you money, the DRMed copy is worth nothing to me, so I pay nothing. As another example, look at fiascos such as Google Video and PlaysForSure. People who downloaded legally from those sources have been penalised and have to pay again for their legally obtained content. Those who didn't bother and downloaded from TPB instead remain unaffected.

Does supporting such schemes really sound like "seeing the big picture"?

"Importantly, copyright law does not provide any such incentive and should be discarded an inimicable to social progress."

Again, please point out where anyone is advocating piracy. New business models are being discussed, which would involve money being paid to the creator. Everything being discussed involves the creator *willingly* giving away a good for free and/or reacting to the modern realities of the marketplace. The only question is whether payment is better obtained indirectly rather than directly on sale of an infinite good.

Re: Re: In essence...

"Copy protection" means DRM."

Please note I used the word "any", which can take a form as simple as an express statement on a CD that the music it contains should not be copied and such copies distributed to others for their own use.

Re: Re: Re: In essence...

That's not copy protection though, that's a statement of copyright laws that apply with or without such a statement. It even applies to music that's legally given away unless the author has specifically stated otherwise (e.g. NIN's Ghosts albums, released under CC).

Re: Re: Re: Re: Re: In essence...

There are other ways around that than needlessly penalising the paying customer. The ones we're attempting to discuss, is where it's made virtually irrelevant if the infinite good is being freely distributed since it's used as leverage to make money elsewhere. There are other models but, as is being proven again and again, artificial technical restrictions and/or removal of consumer rights is not the way to go.

Re: Re: Re: Re: Re: Re: In essence...

Your arguments would carry persuasive force if you proferred a customer beneficial approach that would at the same time enable content providers to prevent unauthorized copying of their content. Until then all you are really saying is that content providers should drop things like DRM, knowing that unauthorized copying and distribution will be the inevitable result, and then make up what they may be losing in sales by selling more of something else.

Re: Re: Re: Re: Re: Re: Re: In essence...

I'm sure you're just trolling now, but OK you have me at one point - piracy is inevitable. Just as kids of the 80s copied albums to tape, and kids of the 90s made mixtapes / CDs, kids today will get hold of content for free. Piracy has been a feature of the music industry for at least 30 years. However, that doesn't mean it cannot be overcome. Just as the "home taping is killing music" propaganda of the 80s was utterly false - music boomed after a new, worthwhile product (CDs) were created despite piracy - so this propaganda is utterly false.

The industry have 2 choices - fight to regain their old business model or come up with a new one. They've spent the last decade fighting piracy, and it's more rampant than ever. Time to try a new model, don't you think?

As for suggestions of which model, well here goes:

1. The Radiohead model: get a low quality MP3 version for free, pay for higher quality. Also, limited edition merchandise available for a fee.

2. The Nine Inch Nails model: give away the first album, offer all 4 as a package. Also offer limited edition merchandise for a fee.

3. The independent movie approach: many indy movies have done this - exchange guest spots, video appearances, advance copies or vanity credit on an album for preset fees. I can't remember the name of the artist now, but this has been done.

5. DJ model & licencing. Many DJs produce their own music, but they often use this as leverage to get lucrative gigs or remix contracts rather than simply selling the music. Much of the electronic artist Junkie XL's career has been spent writing music for videogames, BT has managed to write a lot of movie soundtracks - these aren't big sellers but they get paid fees for doing the spec work anyway.

Those are just off the top of my head, and just concentrating on music. It also doesn't take into account the strategies of various different retailers and websites such as AmieStreet, eMusic, WE7, Beatport, iMeem and last.fm, all of whom are working on different strategies to sell the music without DRM, and in some cases no cost to the end user. Not to mention sales to newspapers, etc. for those artists with name recognition already (e.g. Prince, Paul McCartney)

It would cost the industry less to innovate like these companies than it's costing them to sue innocent people, and is more likely to reap rewards. Oh, and by "innocent people" I mean 12 year old girls, the dead, people who don't own computers and people they have no evidence against not "pirates". The RIAA have yet to conclusively win in court despite their "evidence".

A solution to the energy crisis

If we take Mike's new business model to heart and apply it to the energy field, prices would plummet overnight and the oil producers and refiners would become even wealthier. It would be a win-win situation. All that is necessary is for Mike to convince those people who siphon crude from the ground to give away their oil. There would be an instant increase in demand and with oil being sold as "infinite goods" (although everyone knows it isn't), everyone would become infinitely rich including the oil well operators and owners. Free oil. Just think about it. Wouldn't we all be better off?

Promoting Progress in the useful arts and sciences

Well this seems like a lively little discussion for a change. Of course most of it completely misses the point, but no surprise here at slashdot lite.

OK, let's start at the beginning. Article I Section VIII Clause 8

To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;

Does everyone see how this works, you actually base your arguments in fact, not opinion. Most will notice right off that it says to promote the useful arts and sciences, not much about new business models or digital copies. Funny how that worked out isn't it?

Business models which don't promote the useful arts and sciences, while interesting are irrelevant. Despite how much traffic it might drive here.

One other major problem with Mikebob's ideology, it puts no value on digital copies on writable devices but does value read only devices. Content for disk, flash and even writable CD should be give away, but books, vinyl and even CDs can be sold. This is actually a moral dilemma of staggering proportions. It means that for writers and musicians to make a living they have to pump oil and kill trees. Has anybody thought this through? How much better off would we be if people just pay a small fee for the damn content, particularly if that is all they really want any damn way. The rest of this crap is just driving traffic.

Of course most of Mikebob's hyperbole only makes sense if you don't examine it too closely. 30 000 feet sound about right. Much closer and then it starts to look like a Potemkin Village.

There can't be infinite goods, there aren't even infinite atoms in the universe, there can however, be abundant goods.

There isn't zero marginal cost for digital reproduction, it is however low. I bought a camera which is also an MP3 player, it can with an absurdly small amont of storage, like 32 MB. It cost USD 20 about 2 years ago to bump it up to 1 GB. The marginal cost was 20% of the cost of the camera to make MP3 available. At 5 MB per track (depending on compression rate and length of track) that would be 200 tracks or USD 0.10 per track. Which is a very low cost but NOT FREE!

If you look at godaddy, you will see a tiered pricing structure, 300 GB for USD 4.29 and 3000 GB for USD 14.99. Assume a basic web site can get by with the low cost plan then you have over USD 10 for downloading free music. At 3 MB per track (which is small but makes the numbers easy) that would be USD 0.01 per track, which means probably closer to 2 cents, and that's only if you download the max number. If you go over, it's not clear what to do, the other plans cost more but don't seem to have more bandwidth. The point here is low cost, NOT FREE!

There seems to be lots of alternatives but most of them do not PROMOTE PROGRESS IN THE USEFUL ARTS AND SCIENCES, which would make them IRRELEVANT. My favorite was Mikebob's suggestion that musicians become travel agents, because everyone knows how booking travel promotes the useful arts and sciences.

Now for business models. To stay in business, you have to actually make money. Giving away music is an expense, which many can't or won't foot the bill for. Studio time for that first copy is cheap and getting more so but it's NOT FREE! Also the marginal cost should include profit, you know that thing which keeps businesses in business. This may not be a strict economic definition of marginal cost, but it's definitely part of Smiths Natural cost of things. So while price may approach the marginal cost, it will always have to include profit if the business is to stay in business.

Many of the alternatives are selling digital content on restricted media. Who really wants a diskman when they can have an MP3 player or bother with a paper book when they can have a PDF which can be read to them. For a while I really thought Mikebob just didn't get it. His arguments where always rhetorical and he only made vague references which never really agreed with what he was saying. Then I saw him defend Lessig from a character assignation and realized he really did know how to make a proper argument with proper citations. The only thing one can deduce now is that he's trolling his own site to push up page views. Particularly as his claims start to get wilder and wilder.

Um, I didn't "get upset". This is what you are continuing to fail to understand about my post, which I confess still bemuses me.

it's just an explanation of basic economics... The fact that some people will pay for purely infinite goods is no surprise (even you discovered that). But relying solely on that won't pay the bills (as you discovered).

I bet the guys who run iTMS, Amazon mp3 store, not to mention Microsoft and so on, are glad they don't understand "basic economics" like you do. Otherwise they would suddenly realize that they can't possibly be making such huge profits off "infinite" goods like DRM-free AAC and mp3 music files or Windows licenses, and they would magically go broke.

You don't charge for the time after writing it, but before. That's when the content is still scarce. You can still charge for any scarce good: which includes the physical books (and multiple experiments have shown giving away the ebook increases sales of the physical book)

Careful: you're revealing that you didn't read the part of my post where I said that.

it includes getting someone else to pay you for writing the new book

Uh, like who?

it includes getting the opportunity to write in other formats (columns and the like)

I already do write for national newspapers and magazines. I do hope you're not saying a writer should invest years writing a book for free as a loss-leader to get more journalism work, because that would betray an embarrassing ignorance of the publishing and journalism markets on your part.

it includes speaking engagements

Again, you don't seem to have any idea what you're talking about. Only a minuscule minority of authors write books whose subject matter (mostly fashionable advice to corporations) gets them on the fee-paying lecture circuit. Not everyone is Malcolm Gladwell.

If more convenient business models were put in place, including systems like ArtistShare where you get fans to pay you upfront for creating the new works in exchange for specific benefits and access, then you will want more people to have your older works to get more people involved in paying you for you to create future works.

Thanks for confirming that, although you enjoy congratulating yourself on understanding "basic economics", you have a really weird idea about consumer psychology. If people aren't going to want to pay for an "infinite" digital book, why on earth would they want to pay upfront for the writer's time spent writing a new book when it doesn't even exist yet?

Charging for a finished book, of course, is already the most efficient way to charge for the time spent producing it, with the added advantage that the reader can actually, you know, read the thing right after paying for it.

In short, apart from waving your hands and claiming that you understand economics better than anyone else, you appear to have no clue as to a practical "free" business model for writers, which pretty much confirms the point of my original post.

Re:

"I bet the guys who run iTMS, Amazon mp3 store, not to mention Microsoft and so on, are glad they don't understand "basic economics" like you do. Otherwise they would suddenly realize that they can't possibly be making such huge profits off "infinite" goods like DRM-free AAC and mp3 music files or Windows licenses, and they would magically go broke."

Heh, except that Apple is already being pressured by DRM-free music stores out there, and Microsoft's DRM-saddled store announced recently it was going to pull the plug in what, June?

"Uh, like who?"

This is the real problem I have with all of your (and most other content producers) hand-wringing--IT IS UP TO YOU TO FIND A NEW BUSINESS MODEL.

The fact is that the Internet has fundamentally changed the game for every single content producer (musicians, authors, artists, you name it). If you can't find a way to adapt, then just as evolution culls off those species that aren't fit to survive... so it will be with content producers.

In every other industry, times change, and businesses must adapt to changing consumer/customer trends; just look at how many businesses have moved away from providing goods to instead providing services. They realized that they could no longer compete and/or their goods weren't providing the right value any longer, so they instead moved to provide services around particular goods.

Again, it isn't Mike's job or anyone else's to tell you what is going to work for you--that's your job as a potential content producer. You cannot and will not change 'consumer psychology' at this point; it's becoming ingrained in people, slowly but surely, that digital content should be free content.

Re:

Hi Steven

Totally with you. Actually I've been through this with Mike before and he stubbornly refuses to recognize that creative work needs to be financially rewarded to keep the arts alive (and I mean directly, not through so-called scarce goods).

Also, Mike's "economic realities" are grounded in the fact that the Internet has turned us all into pirates. His infinite goods theory is basically just that - you can't do a damn thing about piracy, so why don't you yourself give away all that you create for free. Otherwise why would any content creator in his senses give away what he can charge for?

Re: Re:

Totally with you. Actually I've been through this with Mike before and he stubbornly refuses to recognize that creative work needs to be financially rewarded to keep the arts alive (and I mean directly, not through so-called scarce goods).

That is great, but what is your plan? I mean, this position comes up a lot, but it seems to amount to "gosh, I wish everyone would pay for this thing I created instead of getting it from file-sharing networks." That's fine, and personally I feel for you (if you're one of those people). But it's really a head in the sand approach. Can you describe what your plan for getting paid is, and why it will work? We can all acknowledge that copyright is being infringed, and even shake our heads and condemn it, but after we do that the artists don't magically start making money.

Re: Re:

Totally with you. Actually I've been through this with Mike before and he stubbornly refuses to recognize that creative work needs to be financially rewarded to keep the arts alive.

I absolutely believe that creative work needs to be financially rewarded to keep the arts alive. In fact, the whole point of this discussion is to come up with better ways to do so.

It pains me that you continue to assume that because I'm talking about the economic reality that infinite goods eventually get pushed to free that it means the artists doesn't get financially rewarded. The fact that I've given so many examples of exactly the opposite, for you to repeatedly insist this is the case, it makes me wonder why you continue to repeated this obviously false statement.

Also, Mike's "economic realities" are grounded in the fact that the Internet has turned us all into pirates.

Not at all. The economic realities are based on the fundamental properties of the goods themselves. Infinite is infinite. The point is that if *you* don't recognize the business models that work, someone else will, and then you'll be screwed.

But if you want to understand the economic business models, then you have to understand the fundamental nature of the goods.

His infinite goods theory is basically just that - you can't do a damn thing about piracy, so why don't you yourself give away all that you create for free. Otherwise why would any content creator in his senses give away what he can charge for?

Not at all. The point is that if you can do BETTER by giving away the goods for free, then why wouldn't you? The whole point is that the business models work better when you accept the economic reality rather than fight it.

Re: Re: Re:

Hi Mike

Thanks for the response. I may be wrong here, but I think you are contradicting yourself when you say you want artists to be financially rewarded, while also stating that "I want to make a living" is not a valid enough reason.

As for the "horse and buggy whips" analogy, well...things are just not the same in the arts, are they? 99 bands may give away their music free, but if the 100th insists they won't, and if people like their music, they can still make a living in violation of your "basic economics" theory.

Or all authors may start giving away their works online. But JK Rowling can still insist everyone buys her books. And I am pretty sure she'll succeed. But that's just me.

Re: Re: Re: Re:

Regarding "I want to make a living" not being a valid reason to buy a book, cd, etc, it most certainly isn't.

It is, however, the primary reason to SELL a work.

Frankly, I could care less if Britany Spears is starving or J. K. Rowling has money to drive to the grocery store. It doesn't even approach being a reason on my list for buy a cd or book.

What IS a reason is whether or not I want what they have to sell. Another reason is whether or not I can get the same thing elsewhere for less.

The whole point of this is that if a consumer wants something badly enough, they'll get it. However, the user generally isn't going to pay out the wazoo just because they really really want something. If they can get it free, they are going to get it free 9 times out of 10. There are a very few people who pay the extra cash to support the artist based on principle, it's not something you can base a business model on.

So, if I like Britany (bleh), and I can get her music for free from X website, is she going to get any money from me? Absolutely not. BUT if I like J. K. Rowling, and I can get one of her books for free from HER website, and I happen to see that the next book in the series is only $5, is she going to get money from me? She probably will, if I like the free book.

See how it works? It's called a hook, like in fishing, you know, free worm for fish, he takes the bait, uh oh HOOK and he's caught. It has been a part of selling things for centuries.

You know those door-to-door vacuum salesmen? They always offer to vacuum your whole house for free. That's probably $50 worth of cleaning if you were to hire a maid to do it, but they give it to you free.

Why? Because, if you see how well the vacuum cleans you are much more likely to drop $1500 on this vacuum than if the salesman just said "this is what it does, wanna buy one?".

You've got to find a hook, and there is no bigger hook than FREE in marketing. Look around at any advertisement, 9 times out of 10 they'll have "free" somewhere in the add, even if it's for essentially nothing.

This really is basic economics folks. The problem is nobody likes to see something they've put so much time and effort into turned into a simple hook, but that hook is what makes you a LOT of money. And that's the point, isn't it?

Re:

"I bet the guys who run iTMS, Amazon mp3 store, not to mention Microsoft and so on, are glad they don't understand "basic economics" like you do. Otherwise they would suddenly realize that they can't possibly be making such huge profits off "infinite" goods like DRM-free AAC and mp3 music files or Windows licenses, and they would magically go broke."

Yes they are going DRM free, but please stop spreading the FUD:

"DRM-free" != "free of charge"

I pay more than €30/month on DRM-free downloads. I refuse to buy DRM-laden downloads. Guess who's going to make money from me?

The argument is whether people who can't manage to make money directly from these downloads should whine and blame "piracy", or whether they should find other ways to profit using the infinite good as leverage. We're advocating the 2nd option.

Re:

Um, I didn't "get upset". This is what you are continuing to fail to understand about my post, which I confess still bemuses me.

I already explained why your writing suggested that you got upset. Using terms like "freetard" and "high-falutin' idealism" for those who were explaining the other point of view, didn't exactly suggest that you calmly and rationally listened to those suggestions. On top of that, suggesting that some of those who actually did pay you were actually saying "fuck you" to you, also suggested that perhaps you were a little upset by them.

All in all, it suggested that you tried a half-hearted version of what they were doing, and then got upset that it didn't work.

I'm sorry if I read you wrong, but saying someone said "fuck you" to you by their actions certainly sounds like you were upset.

Perhaps you could explain how one would read that differently?

I bet the guys who run iTMS, Amazon mp3 store, not to mention Microsoft and so on, are glad they don't understand "basic economics" like you do. Otherwise they would suddenly realize that they can't possibly be making such huge profits off "infinite" goods like DRM-free AAC and mp3 music files or Windows licenses, and they would magically go broke.

Earlier this week we showed how the percentage of music access that was through things like iTunes and Amazon was rapidly decreasing as a way for people to access music.

So, no, it doesn't happen immediately, but if you actually think people will be paying $1/track 10 years from now... well, I'll bet you're wrong.

It doesn't mean that you can't make money in the interim. But I wouldn't bet on it as a long term strategy.

it includes getting someone else to pay you for writing the new book

Uh, like who?

Someone. Anyone. Your fans. A corporation. A publisher. Sponsors. Patrons. You name it.

I already do write for national newspapers and magazines. I do hope you're not saying a writer should invest years writing a book for free as a loss-leader to get more journalism work, because that would betray an embarrassing ignorance of the publishing and journalism markets on your part.

I didn't say that. I pointed to a bunch of different business models, where a combination of those and other business models could suffice to help someone make a living writing. One aspect of these would be additional commissions to write for newspapers or magazines. It's the *combination* of these different things that makes the business model work.

It's rather silly to pick apart each one individually, since that was never the point.

Besides, look at how *most* authors today make their living anyway. A very tiny percentage actually makes enough from writing alone. What we're talking about is a series of business models that will actually help *more* authors be able to make a living through writing alone.

Again, you don't seem to have any idea what you're talking about. Only a minuscule minority of authors write books whose subject matter (mostly fashionable advice to corporations) gets them on the fee-paying lecture circuit. Not everyone is Malcolm Gladwell.

I like how earlier you claim I didn't read your whole post and then you TOTALLY ignore that I already answered your point above in my comment, saying that you're going to respond by saying this isn't what happens now.

Thanks for confirming that, although you enjoy congratulating yourself on understanding "basic economics", you have a really weird idea about consumer psychology. If people aren't going to want to pay for an "infinite" digital book, why on earth would they want to pay upfront for the writer's time spent writing a new book when it doesn't even exist yet?

You'd be amazed. Ask Maria Schneider how it worked for her. Ask Jill Sobule how it worked for her (she just raised $75k to make her new album through this method). It works fantastically well, if done properly.

The reason has everything to do with both economics and consumer psychology (which despite your claim are basically one and the same). People will pay for scarce goods because they intrinsically recognize that what they're paying for is scarce. They are more hesitant to pay for infinite goods because they know they can get it free. So the basic consumer psychology is pretty straightforward.

Charging for a finished book, of course, is already the most efficient way to charge for the time spent producing it, with the added advantage that the reader can actually, you know, read the thing right after paying for it.

But, that's the thing. When you charge for a book, you're NOT charging for the time spent producing it. You're charging for the scarce good of the bound paper -- which is made valuable by the content inside.

The content is what makes the bound pages valuable. The infinite good (the content) makes the scarce good (the book) valuable. Focus on ways to do that and you'll be fine.

In short, apart from waving your hands and claiming that you understand economics better than anyone else, you appear to have no clue as to a practical "free" business model for writers, which pretty much confirms the point of my original post.

Interesting. Well, I'll accept the fact that I haven't convinced you, and I'll accept the fact that the burden is on me to convince you, but I'd suggest that you seem predisposed to dismiss those who are trying to help you as freetards telling you "fuck you." That makes it difficult to think that you actually are willing to listen to what folks are trying to tell you.

In the meantime, I'll continue to better formulate the argument -- but the more success stories we see along these lines, the weaker your argument looks in claiming that we don't know what we're talking about. We're seeing tons of success stories, plus we have stacks of economic research to backup these discussions. You seem to be saying it can't be true because I can't explain it clearly. And, for that, I'm sorry. But it doesn't mean we're wrong.

I am pretty sure I want to pay some guy who have a track record to write new games...or new books..or new arts.

That's nice. You and whose army? And what about the guy who doesn't have a "track record" yet?

Ever heard of publishers paying for the privileges of being the first guy on the block to publish a writer's book?

Funnily enough, I have, since I've been in that fortunate position. However, we are talking about giving away books for free. Find me a publisher who'll pay an author for the privilege of giving away her book for free, and then we can talk further.

Is it giving everything away for free or is it using free goods to sell scarce goods?

Sorry — this comes down to the OP's false account of what I wrote again. In my post I emphasized that giving away free electronic versions of books is an excellent idea as long as the book also exists in a physical form that is being sold, because it is good publicity/drives sales of the physical book etc. (As I mentioned, this is what Cory Doctorow does.) The point of what I wrote was then to ask what happens if/when electronic reading becomes the norm. In that case, the equation changes.

For your example: no publishers will pay advances to authors if they can't recoup that money by selling something at the end. If there isn't a physical book to be sold, and they "can't" sell electronic books because those are "infinite" goods, then authors just won't get paid that way. I still see no practical suggestion as to how the author can get paid for her time writing the book in this case.

Re:

"I still see no practical suggestion as to how the author can get paid for her time writing the book in this case."

And that's not our job to supply a practical suggestion, Steven--that's the job of yourself and the publishing industry. Just like the music/recording and motion picture industries... the publishing industry will be forced to adapt, as well.

Re:

So this is dependent on whether you believe Mike's models can be universally applied and whether or not you believe the examples could be applied to you as well.

Nonetheless, I don't believe in a future where new books won't be reproduced because you couldn't sell physical books. The market will alway find a way to reward people who meet the demand of the market.

However, I encourage you to experiment with different models that don't rely on the power of copyright monopoly so you can make a living in case copyright law become irrevalent. I see that you already found a way to make do without the need of copyright in the current situation.

As for the misunderstanding, I think this is understandable. People constantly misunderstand ideas all the time. That's just the nature of communication. For example, people misunderstand what I believe in. Like they might believe that I have something against commercial activity. Perfectly normal.

Re:

I don't know the book authorship world very well, but are you saying that the majority of authors make their main income from the sales of books?

How do newly starting authors make money while authoring their initial works?

How did authors make money back when there were extremely few publishing houses? Back in the old days when publishing technologies could not put books out quickly enough? Back when populations were typically not literate enough to be reading vast quantities of books?

How did Shakespeare make his money?

Do authors hate libraries?

I just don't understand why so many people in this thread seem to believe that the creators of an artistic work make their mainstay from the sales of those works. I cannot see how that can be true for any but a handful of well-knowns and the odd Oprah-inspired one hit wonders.

JK Rowling isn't an interesting study because out of the 9 billion or so people who have existed in our relative civilized societies there are extremely few who have ever hit anywhere near her level of success.

Aren't most artists quite poor until late in life (or post life)? So why do we think that by limiting an artists fans (and potential customers) in accessing and experiencing their works that we can make the artists happier/wealthier?

mixing philosophical and economic arguments

I think some of the confusion comes from not separating the so-called "Slashdot argument" (Poole's term) from Mike's argument about "infinite goods" (which may be original with him, AFAIK). These are actually separate arguments.

When someone publishes a recognizably original work which, in the absence of file-sharing and pirating, could be profitably marketed, then the author and publisher have a (joint) monopoly over that creation, so monopolistic supply and demand theory applies. This is true even if the work is something as mundane as a friendly tutorial on one of Microsoft's products. Yes, there are nearly always substitutes for the author's product, including books by other authors and free tutorials from Microsoft's web site, but the author and publisher still have a monopoly; the effect of the substitutes is that the demand curve (Price vs. Quantity) is not as high as it would have been otherwise. The demand curve is downward sloping and the supply curve is gently rising as quantity increases; but it is NEVER zero because the book cost significant money to create. Of course, old fashioned non-digital books also have non-trivial manufacturing, distribution, and retailing costs; but even digital books have a substantial initial, content creation cost.

This monopoly is currently protected by copyright law in the US and most other countries.

Poole's "Slashdot argument" is "information wants to be free", so that everyone should be able to freely copy digital goods, even w/o the consent of the original authors and/or publishers. If this were true, then the author and publisher no longer have a monopoly, and the "competitive" price would tend towards zero (actually, there are site hosting and marketing costs, but let's ignore those for now).

IF this were the case, THEN the "Techdirt argument" would apply, that since MR=MC in a market at equilibrium, MR would tend towards zero. In fact, the supply curve would be nearly flat and (almost) zero because every other provider of the book, besides the original author and publisher, has zero acquisition cost. So they don't have to factor the fixed or sunken cost of content creation into their price.
Everyone would have to charge something pretty close to zero in order to move anything (again, perhaps a bit above zero to cover hosting, IT administration, etc). In practice, they'd probably give the contents away for free and try to make their profits with advertising.

So I think the reason some thick-headed people don't "get" the Techdirt argument that Mike keeps raising, is that they don't necessarily agree with the "Slashdot argument" that is needed to set up the situation where the Techdirt argument applies.

Re: mixing philosophical and economic arguments

Your comments proceed under the apparent assumption that the readers already have a grasp of the terms you utilize. I suggest this is most likely not the case at all. Terms need to be explained so that they are easily comprehend by those not versed in economic theory.

Perhaps some of those you associate with the pejorative term "thick headed" appear to you as such because of the assumption I note above.

Adding significant confusion to your comments is the consistent reference to "monopoly". It is difficult to envision a product or work of authorship that falls within the definition of monopoly as that term is typically understood and used by persons not versed in economic theory. Moreover, it is difficult to envision how the mere fact that patent/copyright law a priori confers a monopoly where many, many efficacious substitutes are available to consumers.

Perhaps you are providing useful insight into the inner workings of our market economy, but that insight is largely lost by how you are communicating it.

You may want to consider revising your comments mindful of what we all agree is the "KISS Principle".

Re: Re: mixing philosophical and economic arguments

I used the economic lingo in response to Mike, who routinely uses the "zero marginal cost" argument as a cornerstone of his theory of "infinite goods". The term "thick-headed" was self pejorative sense (probably not obvious - sorry), because I count myself among the thick-headed ones who basically disagree with Mike.

Re: mixing philosophical and economic arguments

I don't think the argument is that everything "should" be free. The argument is that economic trends tend to push the price down, and while people recognise that the cost of producing a digital item is close to zero that another reason for people to pay up needs to be generated.

If you read the article again, it's not a call for everything to be free of charge. In fact, if you read past articles on Techdirt, there's plenty of support for new digital sales models (e.g. WE7, AmieStreet) that try to do something different. The big problem is that the music industry (and other content providers) seem intent of enforcing both control and prices on the market, and this won't work.

"Of course, old fashioned non-digital books also have non-trivial manufacturing, distribution, and retailing costs; but even digital books have a substantial initial, content creation cost."

Again, that's recognised. The idea is that because the marginal (rather than initial) cost of manufacturing is close to zero and the perceived value of a digital file is far lower than for a physical item, it may not be possible to make money directly from the item itself. Therefore, the digital item may need to be used as leverage to make money from another good. In the case of the book discussed in the article, it's mentioned that it was an 8 year old book. Was it still in print? If so, was the book advertised as a buyable item when the digital version was given away? Was there any incentive to buy it? How were sales affected?

We don't know, so from the article we have to assume that it wasn't. That was the point of the original article - you can't just put a tip jar online and call that a business model, you have to leverage something else alongside it. Just because one experiment didn't work, that doesn't mean the whole idea of "free" is unworkable, and just because "free" has been shown as a workable model, that doesn't mean everyone should use it. It's just that there are many alternatives to fighting piracy than trying to sue customers and search engines.

Re: Re: mixing philosophical and economic arguments

There are various markets for digital content. For general news, the market is very competitive because there are many outlets providing similar information; if the New York Times charges for subscriptions, most people will choose to get their news elsewhere. For most of pop music, the "Slashdot principle" is the reality, except that now many are willing to pay for some of the content they consume through itunes. Movies are moving in that direction as well. But books under copyright typically don't have perfect substitutes, and the slashdot principle hasn't taken hold (yet) so both the demand and supply curves are nonzero. (In my earlier post I should have said that the supply curve is gradually falling, not rising, at increasing quantities to reflect the amortization of the creation cost).

The fact that marginal cost is zero is only part of the picture. The average cost is always nonzero because the author and editor had to be paid, the publisher had to advertise or market the book, etc. Otherwise, this would be like telling Bruce Springsteen: "it doesn't cost you any more effort or expense if 30,000 fans show up instead of 20,000, so your marginal cost per seat is $0.00 and that's what you charge. For every ticket."

Re: Re: Re: mixing philosophical and economic arguments

this would be like telling Bruce Springsteen: "it doesn't cost you any more effort or expense if 30,000 fans show up instead of 20,000, so your marginal cost per seat is $0.00 and that's what you charge. For every ticket."

[I'm ignoring the fact that playing to a larger audience most certainly does cost more (security, seating size, bigger sound, etc...)]

Let's say that the cost for Bruce to play to one audience member compared to 30,000 is the same (same time, roughly same overhead in setup, etc...), your example ignores the most basic of economic factors: supply and demand.

Bruce in fact will play for an audience of 1, and he'll charge very, very handsomely for it...approximately the price of 30,000 regularly priced concert tickets. And he charge that because there are very few individuals with the money and desire to hire Bruce under that pricing model.

For Bruce to put food on his plate those other days, he lowers his price and sells more tickets. He realizes that if he drops his price by 1/10, he likely will find more than 10 people willing to pay but not necessarily in the same geographic location and/or for the same date/time.

So instead he lowers his price much further, sets his own date and place, and sells thousands of tickets. The price he charges is a function of the maximum amount he thinks he can charge to fill the particular venue for that date/location.

Bruce doesn't give his concert away free because his concert is a scarce resource. He can command a good price for that. If Bruce decides to follow the lead set by Prince and some other acts, he might offer his latest CD for free to all concert goers because that is an infinite resource and he might realize that these fans likely already own the CD and just might share that CD with friends...thus opening the way for future sales at a grand cost of (nearly) zero to himself.

In fact, that is exactly how I got my copy of a recent Prince CD. A friend walked away with a handful of the disks and gave them out. I would never have purchased the CD myself, but now that I have it I'm interested in checking out more of his works and possibly attend his concert the next go around.

Or maybe not. But it cost Prince next to nothing in an attempt to get my attention as a customer. Hmmm....sorta like advertising, only it cost him barely anything and he was completely in control of the materials used and the campaign itself.

Re: Re: Re: Re: mixing philosophical and economic arguments

You're right, the marginal cost of the 20,001 concert seat is not zero. But it *is* tiny compared to the fixed cost of putting on the show in the first place, or the cost of supplying the first seat as you suggested. Probably at least three orders of magnitude less. This is comparable to the situation with digital content, where in fact marginal cost remains nonzero even at high quantities (because of site hosting, IT administration, etc), but at a orders of magnitude less than the initial creation and marketing costs. So as a first approximation the marginal cost can be considered zero, as Mike tends to do in his arguments.

Most reasonably popular books under copyright, musical CDs, and movies are also scarce resources, or should be, except that the scarcity of pop music and movies has been degraded over the past 8-10 years because of illegal file sharing. Notice, however, the reason for this lack of scarcity is that people are breaking the law; with very creative rationalizations, which you can find in abundance by visiting sites such as slashdot. (As an aside, my favorite is: "I refuse to pay for the crappy music produced by the clueless record industry, so I'm going to download it for free"). Without the "slashdot principle", the situation regarding scarcity of books, musical CDs, and movies, is qualitatively similar to the Springsteen concert example, although admittedly Springsteen is much more popular than most. And AFAIK, the slashdot principle isn't (yet) dominant in the marketplace for digital books, perhaps because the consumer demographics are different than for pop music.

Re: Re: Re: Re: Re: mixing philosophical and economic arguments

Most reasonably popular books under copyright, musical CDs, and movies are also scarce resources, or should be ...

This is completely incorrect. These things should NOT be scarce resources. Who do you think is in control of the decision to release the resources under a constrained medium (e.g. vinyl) rather than an infinitely reproducible medium (i.e. digital)? By your argument (should be a scarce resource), it certainly isn't the consumer.

So if the work should be scarce, why are publishers making it available in a format that is easily and infinitely reproducible?

Re: Re: Re: Re: Re: mixing philosophical and economic arguments

Nonuser,

You decided to detail a point that I stated I'd ignore.

Then you go on and on about the law, which completely misses the fundamental economic point I made about supply and demand.

However, you do make a very good point: many, many people are breaking the law, many without remorse and many newcomers without really understanding that there is any wrongdoing in the first place ("hey, i found it on the internet").

This highlights to me that there is a real need to re-analyze what the basic purpose of these laws are. If a good portion of the public are violating them (some purposefully, some inadvertently), then really what are they there for?

Yes, some businesses (mostly corporations but in some cases individual artists too) will be affected by changes to these laws, but analyzing the impact of such a change appears to be a worthwhile effort.

Even with enforcement, strengthening, and lengthening of the artificial protections these laws offer, the basic trend of the public appears to be against these laws.

And yet, even with the trend being against, we still see huge profits from those businesses crying foul.

This is not a case of public safety or national security (regardless of what points Hollywood makes about the threat of the economy).

I elect government officials to look out for my best interests. Sometimes there is a need to take the "greater Public Good" into account and enact laws or create programs that are contrary to my personal, immediate best interest all in the name of the Public Good.

Is penalizing an increasing number of citizens for the sake of a few businesses really in the interest of the Public Good?

How is our society at large benefiting by retarding technological (and economical!!) progress? Stifling competition and innovation while enabling stagnant business practices is not in the Public Good.

Re: Re: Re: Re: Re: mixing philosophical and economic arguments

You're right, the marginal cost of the 20,001 concert seat is not zero. But it *is* tiny compared to the fixed cost of putting on the show in the first place, or the cost of supplying the first seat as you suggested. Probably at least three orders of magnitude less. This is comparable to the situation with digital content, where in fact marginal cost remains nonzero even at high quantities (because of site hosting, IT administration, etc), but at a orders of magnitude less than the initial creation and marketing costs. So as a first approximation the marginal cost can be considered zero, as Mike tends to do in his arguments.

Nonuser, you seem to be discussing apples and oranges.

The only reason why the marginal cost matters when it comes to infinite goods is because the market is competitive. That's what drives the price to zero. When you control a stadium and have a scarce resource (i.e., Springsteen) performing there, there is no competitive market for those scarce seats.

Thus, you can charge a premium and make a profit.

Most reasonably popular books under copyright, musical CDs, and movies are also scarce resources, or should be, except that the scarcity of pop music and movies has been degraded over the past 8-10 years because of illegal file sharing.

Again, piracy has nothing to do with it. The fact that it's an infinite good is fundamental to the good. I'm not sure why people keep wanting to tie this to piracy. The only thing piracy does is highlight the inefficiencies in the market. It most certainly does not change the fundamental economic properties of a good.

Re: Re: Re: Re: Re: Re: mixing philosophical and economic arguments

Mike and Mobi,

If Springsteen gives a concert in a baseball stadium and there's 20,000 empty seats, what happens if I show up that night and ask to get in for free? We know what'll happen... I'll be told to "buy a ticket and you can see the show". Notice the artist is *artificially* controlling the scarcity of the resource, backed by the weight of the law and his security.

Now suppose I want a copy of Springsteen's latest album. I don't want "Vinny's Back Streets NJ Rhythm Band", I want Springsteen. My choices are 1) pay Sony and and a retailer for a CD, 2) pay Sony and Apple (or similar) for a download, or 3) pirate the music. In other words, it's a scarce resource unless I decide to break the law. CDs cost money to manufacture and distribute, but Sony is admittedly artificially controlling the scarcity of the electronic downloads, because they need to make a profit and the musicians need to get paid. Just like the concert staff limited access to the stadium. The relevant difference between this case and the concert, is that the threat of enforcement is not nearly as tangible or impressive in the case of piracy.

So the claim that infinite goods cannot be scarce, makes sense to me only under the assumption of rampant piracy.

Notice the artist is *artificially* controlling the scarcity of the resource, backed by the weight of the law and his security.

You do not understand the definition of scarcity, at least in the context of this discussion.

The fact that there is a limit at all to the resource (location, time, seats, artist) means that it is a scarce resource. That there are, say, 100 unsold seats does not detract from that scarcity (location, time, artist). There can only be one concert in one place at one time.

The fact that there are 100 unsold seats that still can command a non-zero price is simply economic reasoning:
If a promoter/venu (usually concerts are run by a promoter like Ticketmaster, not the artist) gets a reputation of lowering the price of unsold seats, then there is an incentive for fans to hold off buying. The cost/risk of running future events goes up dramatically as sales become unpredictable.

So swallowing the 100 unsold seats for today's concert is likely much cheaper than the cost/risk of the instability of future concert sales. In fact, the model used to establish the price of the tickets will take into account a certain number of unsold seats, specifically to cover this case.

None of this has to do with "zero cost" because a concert is NOT an infinite good.

In other words, it's a scarce resource unless I decide to break the law.

Yes, thanks for repeating what Mike has said.

Today artists (well, really, the recording industry) sit behind the stagnant business model you are talking about: they are leaning heavily on a law whose purpose is to inject artificial scarcity (as I mentioned in my other reply, the "artificial scarcity" you mention is not artificial...it is a scarce resource).

Mike is not saying that the record industry is legally in the wrong. They are completely fine (in the US and a bunch of other countries) to sit on governments to maintain their business model (i.e. send for the cops, leverage the courts, etc...)

But what Mike is saying is that these businesses are doomed to failure specifically because they are relying on these artificial barriers.

Slowly, but surely, some artists will begin giving their music away without restrictions of any type, because they want to leverage "free" as a part of their business model. They want people to hear about them so that people show up to their concerts, buy their shirts, get paid to write/perform for other outputs (soundtracks, plays, advertising, company parties, etc...)

When that starts to happen (it already has), and artists begin to understand that this approach makes them MORE money than they do under the existing (and stagnant) recording industry model, then that stagnant model breaks.

Notice, the above has NOTHING to do with piracy. Today's piracy is wrong (legally/morally/whatever...it is wrong).

However it highlights that the artificial barriers the recording industry is nearly 100% dependent on are breaking. Fighting this natural progression cannot be sustained, not because of piracy, but because new business models will surpass the ancient and decaying ones.

The other thing to note is that artists have not been treated well under the traditional models anyway. Bands have needed to compromise or produce poor quality goods just to get out of their contract. it's a well known fact that, for example, two of the biggest stars of the 80s (George Michael and Prince) spent most of the following decade in court over contract and royalty disputes.

It's also no accident that many of the acts who have been pioneering these new models (Prince, NIN, Radiohead, The Charlatans) or have been reported as considering them (Oasis, Jamiroquai) are bands who have recently been released from their original major label contracts and have decided to go independent.

They've seen what it's like within the system, and they don't like it. that message is getting across to a lot of new artists, who don't bother trying the traditional method to begin with.

What you say is true regarding CDs. Downloads? Not so much. The point that's being made here is that once albums go digital, there's no longer economies of scale nor physical production and distribution costs to hold them back. It no longer matters whether you sell 10,000 copies or 100,000 copies - the relative differences in cost are negligible.

On the other hand, a concert has a fixed cost which the promoters and artists will be right to try and claw back.

2So the claim that infinite goods cannot be scarce, makes sense to me only under the assumption of rampant piracy."

You seem to have misunderstood the entire point of the majority of articles and comments here. Due to the points I made above, these goods are infinite. They, therefore cannot be scarce - it's impossible to be scarce and infinite at the same time! The only way that scarcity can be introduced is through highly artificial means, and that's where the problems with DRM over the last decade have come from.

Re: Re: Re: mixing philosophical and economic arguments

You're missing something significant in the reference to concert seats: there's a limited supply. You can't *make* more seats juast because more people want to be at your show. So now that supply and demand drives the cost.

You can't apply the argument for infinite goods to a scarce good and then claim that the model fails when your example breaks. You broke it when you put a scarce good into it.

I'm not spreading FUD: I'm merely pointing out that the claim that the cost of "infinite" digital goods inevitably approaches the near-zero marginal cost is not borne out by actual market facts today, where many people profit from selling such goods. This has nothing to do with whether I personally can or not; I'm just pointing out some facts that don't seem to jibe with the slogan of "basic economics" to which I'm invited to subscribe.

In the case of the book discussed in the article, it's mentioned that it was an 8 year old book. Was it still in print? If so, was the book advertised as a buyable item when the digital version was given away? Was there any incentive to buy it? How were sales affected? We don't know.

Uh, apart from the last question (for which I don't yet have figures), you would know if you had bothered to read my original post. In that case we might even be able to have a real conversation.

By the way, my original post didn't mention "piracy" at all. That was Pogue's take. I also solicited ideas about alternative business models, and got some very interesting suggestions from commenters. As I wrote, in all, I consider my experiment with one version of "free" and the subsequent discussion to have been a great success.

The basic problem in this thread, by contrast, appears to be that you and others here are hastily assuming that what I wrote fits into the category of "That same old argument we've heard before", to which you can trot out your boilerplate reply. Unfortunately, it just makes you look intolerant and ideological, and incapable of engaging in civil discussion with someone who dares to disagree with you even a little bit.

Re:

OK Steven, thanks. My interpretation of your post was that you were implying that if iTunes et al went completely DRM-free then they'd somehow stop being able to make money by selling the music.

I also apologise if I misinterpreted any of your original posts - I've been popping in and out during slow periods at work and I'm sorry if I mixed up your statements with others opinions or statements.

However, I don't think I've been intolerent of anyone else's opioins, and I certainly haven't been typing boilerplate replies. Piracy came up in my response to you partly because I've been replying to other posts (in this thread and the next one down) that seem to either assume that DRM-free means piracy or that people advocating these free models really wants to pirate goods, and they were not directed at you.

I would note however that I certainly did read the original posts, and frankly I didn't see the links to Amazon or Unspeak nor links to the book anywhere on your site apart from within the blog entry. Now that I've noticed them, I wonder if you saw any increase in sales through those links? I also wonder why you would only offer the download for a limited time since it's being released under a CC licence anyway? Surely that would only lead people to other sites where they can download but not have a tipping facility?

I have now downloaded the book, and I will treat it the same as any other download - you can expect a donation if I read the book and enjoy it. I'll stress - if I read it and enjoy it - I won't pay for bad material, and I have a backlog of books to read right now. However, I would stress that the fact that I've downloaded the book and not donated does not mean that I either a) won't ever donate, nor does it mean b) that you'll never see any money from me. I had never heard of you before, now that I have I might check out Unspeak if I see it in a store. If I buy it, that's one copy that would not have sold if you'd never given away the PDF.

In the meantime, might I suggest that if you wish to avoid angry comments and misinterpretations that you don't post inflammatory material to your blog? "Oh Mr Freetard, you work as a programmer, do you?" is an invitation to inflammatory comments in response. The post as a whole was littered with comments that gave the impression of someone who didn't consider the business model as viable just because his one-off, poorly thought out experiment didn't work. Although I admit this isn't exactly true after reading it again for the 3rd time, it's a shame that I had to read it 3 times to get the original intention to begin with.

It's not marginal cost but natural price

Once again there seems to be an epidemic of pointlessness. The pricing model is not MR=MC but Price = COG + Profit. There is no Profit in zero revenue, there is just whatever the expense was to create it. The problem with pirating is the fact that the rent seeking record companies haven't reflected their lower cost in lower prices. I'm sure since the price of oil is now well over the historic multiple of the "lifting cost" people would be happy to show their displeasure by not paying for oil if they could.

This whole silliness about information wanting to be free, with all due respect to rms, is just absurd. As Steven pointed out, information is inanimate, it has no wants, one way or the other. The people who control the information want it to be captive, the people who don't control it, want it to be free.

The other problem people have with entertainment is how a very few seem to reap almost all of the benefits. The easiest solution here is to just cap it. The copyright expires after 28 years or USD 100 K, which ever comes first. At USD 1.5 Million per CD, it seems that would solve many of the problems. I mean really free? Television is ad supported, no marginal cost to the view, but yet HBO seems to do OK. Itunes, even with it's overpriced drm ridden offering seems to do OK.

Finally, why not follow Lincoln's advance, I eliminate an enemy when I make him my friend. Why not put together a P2P network where you buy the music and the people who share the music get a cut. If you eliminate the rent seeking record labels, then the price could be 10% of the iTunes price and the act could still make money. If it's capped at USD 100K per track, those very popular acts would be incentivized to produce more music, while the vast majority of acts would be able to make a living.

That would be how to promote the progress of useful arts and sciences.

Re: It's not marginal cost but natural price

I'd love for you to point to a single economist who recognizes this (other than a socialist one, I mean).

Wouldn't it be a wonderful world? Unfortunately, it's not the world we live in, where price actually is driven by the intersection of supply and demand, which is what drives price to marginal cost.

There is no Profit in zero revenue

Nor has anyone been suggesting a zero revenue model... other than you.

This whole silliness about information wanting to be free, with all due respect to rms, is just absurd. As Steven pointed out, information is inanimate, it has no wants, one way or the other. The people who control the information want it to be captive, the people who don't control it, want it to be free.

This is a misreading of what has been said. We are simply talking about the competitive free market, under which information, by its nature (once produced) gets pushed towards a price of $0. You can deny it, but you'd be denying 230 years of economic understanding.

The other problem people have with entertainment is how a very few seem to reap almost all of the benefits. The easiest solution here is to just cap it.

Beware of those who have no understanding of fundamental economics declaring "the easiest way..."

Why not put together a P2P network where you buy the music and the people who share the music get a cut. If you eliminate the rent seeking record labels, then the price could be 10% of the iTunes price and the act could still make money. If it's capped at USD 100K per track, those very popular acts would be incentivized to produce more music, while the vast majority of acts would be able to make a living.

That works until a musician recognizes that he can make more than $100k per track by giving away his content totally free. Then everyone abandons your model and *bam* then what?

The same as any business model

I'd say that complaining that any business model you decide on doesn't work is pointless whining. There are no guarantees in anything, you work hard to build a business, you see what works and what doesn't. Luck, connections and hard work all play a part, but whining never fixed anything

Free as a promotional model

In answer to a number of arguments here, I once again plug Baen Free Library, which shows how giving electronic books away can increase sales of dead trees. Take a look. Read Eric's introduction, read the Prime Palavers. Read the figures, see how older titles have had an unprecedented increase in sales.

Re: Free as a promotional model

Baen has gotten about $150 of my money they probably wouldn't have gotten otherwise as a result of their Free Library. When one has read 6 books of a series, it isn't hard to decide to pay $6 to find out what happens next in the 7th.

Tor.com is giving away free e-books, DRM free, multiple formats... just get on their mailing list.

One can make a profit on "free" if one is smart enough to know what one is actually selling. Too bad about the idiots, but Darwin is always waiting for them.

What *has* been shown to be true is that the complementary products associated with the content are driven up in value enough to pay for the creation of the content.

The basis of your argument seems to be to select a few relatively insignificant exceptions, and try to claim that they represent a general rule. What is your evidence that the production of complementary goods/services can come even remotely close to stimulating the levels of investment observed with intellectual property rights?

You may doubt, but the economic history suggests you would be wrong to doubt that.

Re:

The basis of your argument seems to be to select a few relatively insignificant exceptions, and try to claim that they represent a general rule. What is your evidence that the production of complementary goods/services can come even remotely close to stimulating the levels of investment observed with intellectual property rights?

No. Not at all. The basis of my argument is to bring together historical evidence, economic history, economic research and economic theory -- combine those with some examples that help prove the whole thing works and toss it out for folks to understand.

The problem is that every time I point to one aspect of this (say the economic research) people insist that it would never work in real life. Then I point to the examples of it working in real life, and people tell me it only works for that one exception.

I'm having trouble figuring out what is going to satisfy folks who refuse to look at the entire argument as a whole.

Oh really? Would you care to be more specific?

Where to start... My suggestion would be to look at the research of Paul Romer as well as the recent book by David Levine and Michele Boldrin. But those only touch on pieces. There's a lot more if you want to start digging.

PaulT — thanks, I hope you enjoy the book. But if you don't, no one's lost out. ;)

And yes, one of the upsides I noted about giving away the e-copy was that people might be more likely to pick up one of my future books in a store. Basically, as I said, I think giving away free e-copies as publicity for the bound version or just as general promotion of the author's "brand" is a no-brainer right now. (As long as the author can negotiate the right to do this with the publisher, which however looks as though it is becoming more difficult).

The "limited time" download thing was initially because I didn't know how much bandwidth I was going to burn through and so whether I would be subject to expensive overage charges. As it turned out, I just managed to avoid that.

As for DRM — my "experiment" was inspired in the first place by what I consider to be the onerous DRM of Amazon's Kindle. Luckily, as iTunes Plus and Amazon mp3 are demonstrating, you don't need DRM to sell electronic art: you just need to make buying the stuff more pleasant/reliable than torrenting it. Meanwhile, there are also still people who like to buy software that they could easily pirate. Personally I am happy to support small developers like Macromates, Panic, Hog Bay Software and MacRabbit. I also pay for music on Amie St, mentioned upthread.

So I think it's clear that the slogan that "no one will pay for 'infinite goods'" is not actually true today. Whether it becomes true in the future is not down to some inevitable iron-clad law of "basic economics" but rather, as MJR has been pointing out, down to moral/ethical/social choices that everyone is free to make.

For myself, even though I don't like many things about Amazon's current model, I still think (as I originally wrote) that something like an "iTunes for books" would be a decent development all round.

Mike — thanks for your fuller reply. I'm still not convinced that your success stories from the music business can apply wholesale to writers. But like I said earlier, I don't really know why we got to disagreeing so vociferously. We agree that my tip-jar experiment was not a financial success, and we agree that it would be really interesting to see new business models predicated on electronic delivery of books that can work for writers.

you seem predisposed to dismiss those who are trying to help you as freetards telling you "fuck you."

Well, I really don't think the people who tipped one cent were trying to help me. I think they were trying to say something with that one-cent tip, and yeah, "Fuck you" seems to about cover it. But I didn't find this personally upsetting at all: as I wrote, I actually thought it was quite funny as an ironic comment on what I was doing.

As for the "freetards" line — I will accept that it was provocative, and apologise for any offence caused. But hey, sometimes on the internet provocation gets you noticed. That would be "basic marketing", wouldn't it? ;)

What *has* been shown to be true is that the complementary products associated with the content are driven up in value enough to pay for the creation of the content.

Really? That's been shown over what period? In what media?

However, if you have an abundant resource, then there's no question of how you allocate it efficiently, because everyone can have as much of it as they want. There is no *need* for a market. That's why you don't have a market for air. It's abundant.

Air is not really a good analogy for books or albums or boutique software products or engineering plans or pharmaceutical innovations or any other of the multitude of things that come under "intellectual property" and are theoretically "abundant" just because they consist in "information". Air already exists all around us. Packages of "information", however, in the form of books and albums etc, are created one at a time by people. If those people do not have a private income and so need to earn a living, but see that there is no economic incentive for them to create those packages of "information", then in very many cases they simply won't make them. In that case the "information" in question is the opposite of abundant: it doesn't exist at all.

Can't give it away anyway

Funny all the whining about authors not being able to cash in on free -- most couldn't give away their books if they tried. The reality is that very few people read books any more so it should be no surprise that almost no authors make a living by actually selling books (statistically zero). Too many titles, too little attention, and a marketing strategy by publishers that resembles the lottery. But even in a basically illiterate culture like ours, writing books still brings other values to the author (prestige, speaking opportunities, job opportunities, etc.). Free can clearly be used to maximize these benefits. Not rocket science.

One possible alternative meaning of a one cent tip

While it is possible that some people were insulting Steven with a one cent tip, here is a alternative possibility...

Some checking accounts in the USA require 10 debits be made per month to qualify for a high rate of interest. I have seen web sites devoted to people brainstorming ways to make one cent donations/debits against the accounts. Some people even try to fill their gas tank in 1 cent increments.

Thoughts, ramblings and observations

If I say "Think of any object, but don't think of a black cat," What do you do? You think of a black cat. This happens because the command "think of a black cat" was there in the sentence.

The same thing holds true to the challenge of this "Pirate Bay Criminalization Treaty". By suing sites such as TPB, or escalating it to a "Trade-specific Treaty" it gains more visibility and credence of an effective solution within the user base. As I see it, the problem isn't necessarily piracy, but actually inability for the powers that be to understand and monetize portions of content which could be shared thru social websites such as My Space and Face Book, which are frequent GenY hangouts.

First off, I am amazed that Sweden has so much power over the US's content distribution business, especially considering they are 5,531 miles away, and speak a completely different language. But what is the US Content distribution interest doing so wrong that millions of people would even risk lawsuit? Why is the distribution model broken so badly? Surely Big Content has segmented their customer base to understand the demographics of supposed infringers or causes of piracy? To offer every supposed consumer the same lifecycle treatment seems short sided, and I think this is where the disconnect is. Yes, it's a cultural thing- GenX/GenY have come to expect more.

I tend to believe that most of the alleged infringers are possibly that of the GenY crowd. Their goals are quite possibly "social" in nature-- to have the best My Space or Face book account, to share (vis-à-vis "market") to friends in their social graph. As such, they enjoy the "thrill of the hunt" much more than others.

What's equally interesting is the notion of every satisfied user tells 3 people of their satisfactory experience, but every unsatisfied user tells 5 people of their unsatisfactory experience. (See: concepts surrounding Bayesian probability such as Management Science: A Bayesian Introduction - Morris, 1968)

Personally, I remain increasingly interested in what's going to happen the next 5-10 years when boomers start retiring en masse. Boomers will find themselves with extra time and start exploring this internet thing on a deeper level, similar to that of which GenY/GenX'ers has had privy to. But, at the same time, GenY/GenX'ers own experiences will be a driving force for technology adoption with Boomers. I can already see some of this in companies that Jim Cramer of Mad Money is recommending.

So how do you properly optimize a distribution model to fit the needs of the business while leveraging a free model for success? It's somewhat simple, and difficult at the same time. What a wonderful problem!

First off, understand the fact that the sharing model is here. How can the business model be adapted to facilitate this? After all, social sites are about sharing a person's personal culture. Culture certainly includes media, music, and art, among others. (I highly recommend the study by OCLC- Sharing Privacy and Trust in Our Networked World, 2007)

Also, understand that much time has been focused on marketing to GenY. However, GenY crowd have limited resources, and time is one of them! So what we're seeing (and what I find quite interesting) is that traditional content such as music, movies, television, and the like are currently being re-prioritized against experiences- videogames, vacations, joining clubs on Meet up, or doing something to fill up a Flick'r album. Why? Again, a desire to share.

So maybe a starting point is to segment the user and customer base. A fan who is in College who downloads a song or two to share on their Myspace page is someone who should be offered an opportunity make up lost revenue via concert, etc rather than a lawsuit. Leverage their social graph. This is inherently a different customer than a Boomer!

Additionally, a delta in product sales may actually mean that there's a problem with the distribution model, or that the content fails to have the value set by the content provider. This very well could be a sales and marketing strategy problem, and not necessarily a problem that needs a solution in legislation. By legislating, it provides credence that to the notion that the product or service works, and accelerates adoption, and increases resources to improve the service. As usability in improved, it erodes potential opportunities with the prime customer base. But legislating is not the answer. Under this model, the winner is he who has the most billable hours. Does this authority need to be granted? Probably not. However, when the authority is granted, there's a high chance of enforcement, and loss of a business model. (There was a fascinating study about this in the late 1960s called the Milgram Experiment)

The most interesting thing I see is how GenY is influencing Boomers to adopt technology. I definitely see their influence accelerating in the next 5-10 years as Boomers retire. How can technology be easier? An interesting metric should be SMS adoption rates by Boomers as a result of American Idol. That would be a very interesting metric.

So in conclusion, I hope when you thought of that object, it wasn't a Black cat, because that isn't the point.

Re: Re: Re: Re: Thoughts, ramblings and observations

Doubtless most. While I deal with all manner of technology, I have as yet to fully master the setup of a remote control.

Exactly!

Technology is created by a minority of boomers, but surely not understood by a majority of boomers. It's true what you say- People get their kids to swing by and hook up their new HDMI TV, or hire Geek Squad. The big market there because older people don't understand.

If boomers knew how to hook up their TV because a boomer created it (lol) there wouldn't be a need for someone to come into their house to do it for them.

The other alternative (more likely, IMHO) is to call your kids, and GenY that fills that gap.

Running Windows from the C prompt is far easier..

You are incredibly well versed, MLS! I doubt many boomers know how to use the C Prompt. I recently had a virus that took me a day to get out of my system. But the question is, could a novice computer user do the same? Highly doubtful.

I recall a few years back, a well-known print author released one of his books, that had after a while reached an expected decline in print sales, for free on the web.

This un-expectedly led to a re-surge in popularity of the work, with a new demand for hard print versions (most people like to read books in physical form more than in electronic form), and in this case it turned out to be pretty good publicity and promotion.

That author had realized the value of this tool and wrote about it in an article about appropriate use of digital "free" within a real business model.

DRM, Intellectual Property, and Infinite Goods...

Mike, I see your point: Infinite goods, no matter what we want them to be, will always trend toward free based on the market economy. This isn't a business model, this is an observation of the reality of the economy and consumer psychology.

Now, I know I'm opening a can of something, but I have to bring this in. You have in the past, argued against DRM in digital media -- which is included as an infinite good -- but this creates a challenge for someone who wants to make money exclusively on their books by using digital distribution.

Is it possible to make money in this way without DRM of some sort? Of course, the question is semi-rhetorical, since, as Stephen P proved, some money can be made.

The content is what makes the bound pages valuable. The infinite good (the content) makes the scarce good (the book) valuable. Focus on ways to do that and you'll be fine.

Ultimately, I feel like you are contradicting yourself. On the one hand, you are suggesting that there is inherent value in the content ... but then you say that the value only exists when you make it artificially scarce by printing it on a medium (paper).

There needs to be a way for people to make money solely based on their intellectual property without being forced to convert it to an artificially scarce resource.

Re: DRM, Intellectual Property, and Infinite Goods...

There needs to be a way for people to make money solely based on their intellectual property without being forced to convert it to an artificially scarce resource.

Absolutely. In fact, I would argue that making the resource artificially scarce will only hurt you in the long run. Consumers "get" the benefits gained from something being in a digital format. Forcing them to an ancient technology isn't going to do them any good and in turn won't do your business any good.

But realize that your line of questioning is still looking at the problem with a fairly closed, tunnel-like vision. You are asking how to make money from an infinite good. And the general response has been not to make the infinite good scarce, but to tie that infinite good to something else that is scarce.

Even this simple twist to the puzzle can have some wide-ranging changes to a business model.

I am an author too. I write software for a living. But I don't make money selling my software, I make my living (and a decent one at that) selling my skills at writing the software.

Why not take that road? Get people to pay you to write! It is your writing skill that is scarce, not the reproducible output of that skill.

Yes, this train of thought is likely contrary to the business model you believe an author must follow, but ask yourself: what is an author? What distinguishes you an author rather than some other type of worker? Then figure out how to get paid to apply your skills in the same way that other lines of work get paid.

Re: Re: DRM, Intellectual Property, and Infinite Goods...

mobiGeek,

I misspoke a little, but you went in the direction I was aiming at anyway, good job.

I can agree with you for software engineers -- I do stuff as a web designer from time to time and I fully understand how you can make money in a world where you must tie something open source (HTML source) into a valuable, bankable commodity (my skills as a designer), but then, that's not my point.

I left out something, or under-emphasized it. What I was trying to get at, is the 'selling out' factor. Is there a way where someone can sell something where they are only selling the intellectual property -- i.e., the story, the song, or the picture -- or, put another way, "art?" Can someone sell art without having to link that to a scarce good?

To me, this sounds like it becomes a statement of "sell out, or starve" -- if the author/artist doesn't want to sell the rights to turn the book into a movie, or if the musician doesn't want to sell t-shirts, then are you suggesting they are forced to hope their music/story/etc makes enough money while knowing full well that is a 'bad business model'?

Re: Re: Re: DRM, Intellectual Property, and Infinite Goods...

I left out something, or under-emphasized it. What I was trying to get at, is the 'selling out' factor. Is there a way where someone can sell something where they are only selling the intellectual property -- i.e., the story, the song, or the picture -- or, put another way, "art?" Can someone sell art without having to link that to a scarce good?

Hi Eliot. To be honest, historically, content creators have ALWAYS connected their infinite goods to a scarce good. The movie industry has always been about selling tickets to theaters (scarce) which are made valuable by the content (infinite). Books (scarce) are made valuable by the content (infinite).

So, there's really no serious long-lasting business model that has been based on selling the infinite goods alone.

Fantastic article - you brought together several extremely important points that build the right mindset for thinking about "free" from the creator side. In addition, the colossal wealth and value creation potential on the consumption side of infinite goods never ceases to capture the imagination...

am i wrong when i say...

I refer you to Mike's comment that, "you're assuming that there's a need for a market in IP when there is none".

If you accept that IP rights are a sine qua non for an information market to function, and are only claiming that it can be profitable in a few cases to give away certain information goods, because they increase demand for other goods/services that are protected by IP laws, then I've no disagreement with you.

Mind you, the argument that some goods can be profitably given away, because they increase demand for other goods, is not something unique to information goods. Exactly the same thing can be said with respect to certain physical goods/services, so you're not actually saying anything new.

To: MobiGeek, #131, re Shakespeare.

Look at Marchette Chute's _Shakespeare of London_ (1950). Shakespeare did not make his money by writing plays. He was a professional actor who wrote plays on the side. Professional writers made very little money writing plays. Some of the information we know about Shakespeare survives because a really unhappy and dead-broke professional writer named Robert Greene, who was ill and dying, wrote some nasty and sarcastic remarks about this actor who was stealing his job. Shakespeare made his money as an actor, and the other actors in his company made just about as much money. Shakespeare did not have amplified sound, so there was a practical limit on how many people could attend a given performance. An average performance might have been attended by a couple of hundred people, on about the same scale as a middle-school play. As nearly as can be determined, Shakespeare was a consolidated bit-part actor. That meant he would play one character for five minutes, then dash backstage to change costumes in about two minutes flat, and dash out to play another character for five minutes, and so on for two hours in one play, and then two hours in another play. And he did this every day or every other day for twenty-five years, from the late 1580's to the early 1610's. A considerable part of the year, the actors had to go on tour, playing in small towns of five hundred or a thousand people. If the audience decided it did not like the performance, it threw things, anything from rotten vegetables to rocks. In theatrical parlance, this is called "getting the bird." All in all, the pay and conditions were more or less comparable to those of a street minstrel. Shakespeare and his pals got ahead because they were the kind of guys who built their own playhouse with their own hands in order to get out from under paying rent. They set up out beyond the city limits to avoid the nuisance laws (actors were legally classified with prostitutes). In short, they were the antithesis of the modern "spoiled brat" rock star.

There's another interesting book, Fred Powledge's _Mud Show: A Circus Season_ (1975), about a traveling circus in the 1970's, which gives a pretty good feel for what Shakespeare's work life must have been like in today's terms.

Re: Good thing Techdirt's

"Here's my bet: In 10 years, free no longer exists in any business model."

Really? I find that unlikely since free samples, free gifts and the like have probably been around since retail itself. How will people hear the music and know if they like it if they can't hear it for free on the radio / whatever first? (and so on...)

"Head over to iTunes and see an example of INCREASING track prices, not decreasing. Based on your points, shouldn't these prices be going DOWN?"

I don't use iTunes, but didn't they recently discount all tracks to 99c again after experimenting with higher prices for non-DRM tracks? Either way, go over to Amazon, Play or 7digital and see them offering the same tracks for lower prices.

"There's no reason why the $1/track model should exist today, but it does. This is because the demand (or the value) is what drives the cost of any product regardless how accessible it is."

On this, I agree. However, in most other industries, competition drives the prices downwards. Raise prices, and you lose customers. I would point out that research has stated that many people don't use iTunes because the $1/track is *too expensive*.

We can't predict what will happen in the next 10 years, but the current model is unlikely to be the one used on a wide-ranging basis. The free models are just one way of differentiating yourself.

Re: Re: Good thing Techdirt's

"Really? I find that unlikely since free samples, free gifts and the like have probably been around since retail itself."
We're not talking retail, which covers its "free" products with the overinflated markup of other items. An entirely different business model.

We're discussing the "free" business model of "unlimited" goods. Your analogy of the "free" music over the radio isn't accurate as well, given the radio sponsors music supported by the very industry which doesn't get the new digital world and continues to support a model that's dying.

You can't tell me the radio plays every artist out there and you also can't tell me the songs I hear on the radio I can get for free without *ahem* other means.

Your statement about competition driving down prices is accurate, but only in tangible goods. Blu-Ray players will eventually fall to $20 each as competition clearly makes a difference.

But the Blu-Ray movie itself will NOT drop in price. In fact, it's gone up. There are many movie studios out there and it never ceases to amaze me the prices of every studio's DVD is relatively the same ($24.99). Only when the RETAILER drops the price does a consumer get a "bargain" and this isn't likely to happen quickly, especially on "blockbuster" titles.

The same thing applies to music, regardless of what download site one hits. The mere fact one has to buy a track at an "inflated" price indicates my statement is accurate. There may be no cost on the actual distribution, but you can bet there's a cost on the value.

"The free models are just one way of differentiating yourself."
Which gets harder for businesses to do when everyone begins to look the same.
Yet Amazon (as an example) doesn't offer free MP3 downloads with every purchase which would clearly differentiate themselves from Walmart and iTunes.

Re: Re: Re: Good thing Techdirt's

"We're discussing the "free" business model of "unlimited" goods. Your analogy of the "free" music over the radio isn't accurate as well, given the radio sponsors music supported by the very industry which doesn't get the new digital world and continues to support a model that's dying."

Do you pay for radio? Do you pay for the music to be played? Is the music limited in any way? No. The only difference between the radio and the music you buy is the fact that you can choose the content of the stuff you purchase.

"You can't tell me the radio plays every artist out there and you also can't tell me the songs I hear on the radio I can get for free without *ahem* other means."

That's down to you as a consumer. Some artists become bigger hits than others though, and part of that is through radio airplay - making money back from consumers who can get the content for free. Even in the current market, artists who get more radio airplay generally make more money.

"But the Blu-Ray movie itself will NOT drop in price. In fact, it's gone up. There are many movie studios out there and it never ceases to amaze me the prices of every studio's DVD is relatively the same ($24.99)."

That's because Blu Ray is:

* A new technology (= much higher production costs)
* A niche market (not everybody wants it, not everyone has HD, it's doubtful that the market will ever be as big as DVD)
* In competition with DVDs, which are "good enough" for the vast majority of people (especially as most people don't want to replace their DVDs like they did their VHS tapes)

If/when the market size comes closer to the market size of DVDs, economies of scale will kick in and the per-unit price will fall. It took a few years for the average DVD to drop below $20 too, now you can pick the things up in a dollar store. It just took a while, and that was with a clear and popular market (which Blu-Ray will never have).

""The free models are just one way of differentiating yourself."
Which gets harder for businesses to do when everyone begins to look the same.
Yet Amazon (as an example) doesn't offer free MP3 downloads with every purchase which would clearly differentiate themselves from Walmart and iTunes.

Why is that? (rhetorical)"

I'll answer that anyway, since it;s a dumb question. It's because they don't make the music. They are a retailer, so would not make money back from e.g. concert tickets. The only way they have of making money at present is by selling goods, so it would of course be stupid of them to give away music, unless it was as a loss leader to attract purchases of other goods (as WalMart do).

The artists on the other hand, the ones we're discussing here, have numerous other ways of making cash.

No, I'm not confusing two separate things. I'm explaining economic principles that touch on a variety of factors.

By claiming that the "natural price" is the marginal cost, you're assuming perfect competition, whether or not you realise it. In a market that is not perfectly competitive, which is virtually every market in the real world, there is no reason to expect price to be equal to marginal cost.

Actually, I understand that quite well. The presentation I gave just last Thursday in Toronto made exactly that point. That the way you profit is to avoid situations of perfect competition, and the way you do that is either by innovating or offering something that simply cannot be copied.

How do you propose to prevent information or innovation being copied, without intellectual property rights? Do you really want to go back to a situation where people prevent their ideas or works being copied by keeping them secret, and sharing them with only a trusted few?

But the point that I'm making is that if you use the fact that MC = 0 to your advantage, you can combine both of those concepts to be better off. And, if you ignore it, you're going to be in trouble when others make that change for you.

Your basic problem is the assumption that selling at (or below) marginal cost is generally advantageous for firms. In a few cases it is, and in such cases firms do sell at or below marginal cost. In most cases, it isn't, which is why most goods are priced well above marginal cost.

Your basic premise that most firms are run by irrational management, who don't understand how to maximise profit, simply isn't reasonable.

I would disagree with you on the point about information goods.

How can you possibly suggest that information goods aren't differentiated? Once information has already been created, the absence of IP rights would effectively allow perfect competition, but the initial creation of the information is crucial: it isn't something like air that's "just there", it's something that requires investment of resources to produce. The whole point of IPR is to promote the creation of information.

First of all, it's not an unrealistic assumption. We see it happening all the time.

I see. Where are these apparently copious examples of perfect competition in the real world?

Second, while there may be some industrial economists who argue against perfect competition, that (again) is not my point. My point is to find situations where you can avoid perfect competition in those complementary goods -- and you do that by attaching those infinite goods to scarce goods that cannot easily be copied.

I would be surprised if you can find any reputable industrial economists who would argue that perfect competition would be optimal in dynamic setting with technological progress, even if it were practicable.

So I'm in agreement with your industrial economists. I'm just explaining the more efficient way of getting there.

You call it more efficient, I'd call it fanciful.

Indeed. I'm not sure what you're arguing here because you're basically agreeing with me -- other than the last sentence about it being "exceptions to the general rule." That's simply untrue. It is the rule. There are very few exceptions.

That's simply nonsense. The overwhelming majority of goods and services are sold at prices that exceed marginal cost.

Actually, I'd argue the reverse. You seem to be set in a static mindset that the only incentive is IP, and that you don't have a dynamic market of complementary goods based on that IP.

In economics, static versus dynamic refers to whether or not multiple periods of time are considered. In a static model where the amount of information in existence is given, it is never optimal to protect intellectual property, because the more widely it can be distributed, the better off society becomes. In a dynamic model, the extent of protection of IP in one period influences the quantity of IP produced in the next period, so there is a trade-off between maximising distribution of currently existing information and promoting production of new information.

Indeed. Driven by the demand and paid for by the sale of the complementary goods. Just as it always has been. Throughout history.

Rubbish. Through much of history, before the advent of IP rights, the norm was to keep information secret to the greatest extent possible. The creation of intellectual works tended to require either independent financial means or a wealthy sponsor. The advent of intellectual property rights led to an explosion of information creation.

Where's the need for IP, except to distort that market?

What market? Without IP there is no price for information, and hence no market. In the same way, abolition of physical property rights would eliminate the market for physical goods, although their rivalrous nature would lead to a more destructive outcome than abolution of IPR (ie physical property rights are more essential to society).

"Widely accepted?" I'm sitting next to stacks of economic research that says otherwise. Most of it makes the rather straightforward point: creating artificial monopolies distorts the market for IP in very inefficient ways.

I'm not sure what sort of research you're reading, but the idea of a trade-off between underproduction and underutilisation goes back to the work of William Nordhaus in 1969. Widely cited journal articles, such as William R Johnson's 1985 classic in The Journal of Political Economy, suggest the possibility that unlimited copying reduces social welfare, and that restrictions may thus improve it. On the subject of patents, I could refer you to the 1990 paper in the RAND Journal of Economics by Gilbert and Shapiro, which presents conditions under which the optimal patent policy is narrow but infinitely-lived patents.

In general, intellectual property rights are widely supported within the industrial economics literature, but there is a great deal of debate around the optimum level. In some areas, IP rights are arguably too broad/lengthy today, and in others perhaps the reverse.

Can you explain how gov't granted monopolies leads to a more efficient outcome? And which economists believe that?

Land ownership is a government granted monopoly too. Do you think abolishing it would lead to more efficient outcomes?

There is no need for such a market in the first place.

To be crstal clear, then, you're saying there is no need for laws protecting international property rights, yes?

Um, don't be ridiculous. Since IP rights do exist, most everyone takes advantage of them, simply because they're there. So limiting what can be included only to things not using IP laws is a false limit (besides, as I've explained repeatedly, trademark is not IP -- it's consumer protection).

I see your view of trademarks is also unorthodox. In any case, I can't really follow your argument as it's been presented. You imply in one sentence that there is no need for intellectual property rights, and then in another make an argument that effectively depends on the existence of such. Please clarify your position.

But the point stands. People pay for scarce goods. They buy the book (scarce) because of the value of the content -- but they're not buying the content. They buy the movie seats (scarce) because of the value of the movie -- but they're not buying the movie.

If you're trying to claim that the value of a book is in the paper, and not in the information, then that is a self-evidently absurd proposition. If, rather, you're arguing that the book and the information are actually two different goods, and that the book is a complementary good, then I think you're missing the point that producers sell them as a bundle. Nobody would buy an empty "book".

People inherently know to pay for scarce goods. But they have trouble paying for infinite goods. That's part of the reason *why* piracy is so rampant. Inherently most people don't see it as wrong because they know no scarce good is being used up.

People have trouble paying for goods that they can easily get for free. It has very little to do with whether or not the goods in question are rivalrous.

Re:

By claiming that the "natural price" is the marginal cost, you're assuming perfect competition, whether or not you realise it. In a market that is not perfectly competitive, which is virtually every market in the real world, there is no reason to expect price to be equal to marginal cost.

Yikes. But understanding that competitive pressures drives the price towards marginal cost is an extremely important concept. And the *smart* business person recognizes that the way to out-compete is to simply drop that price completely to marginal cost and focus on the complementary goods. Because if he doesn't, the others eventually will.

You can pretend that this won't happen, but we see it every day.

How do you propose to prevent information or innovation being copied, without intellectual property rights? Do you really want to go back to a situation where people prevent their ideas or works being copied by keeping them secret, and sharing them with only a trusted few?

I don't propose to prevent information or innovation from being copied. I don't see why it should be prevented from being copied. I said that the way to compete was to offer something that cannot easily be copied -- and that means something beyond just the information or the idea. That's the point. You tie the infinite good to a scarce good.

Your basic problem is the assumption that selling at (or below) marginal cost is generally advantageous for firms. In a few cases it is, and in such cases firms do sell at or below marginal cost. In most cases, it isn't, which is why most goods are priced well above marginal cost.

Heh. Again, you claim that I'm looking at things in a static market? No, in a *dynamic* market, the assumption is absolutely true for a variety of reasons. Economic growth is created out of infinite goods. It's the fundamental nature of growth that it comes from non-rivalrous and non-excludable goods. So, all I'm saying is that by pricing infinite goods at zero, you are furthering the spread of those resources, increasing growth. The trick is then setting yourself up to capture that growth. But the market does grow. I've yet to see an example that contradicts that.

And, given that it leads to economic growth, *someone* is going to capture that benefit and it might as well be you. So, yes, I stand by the assertion that pricing at marginal cost in this market can always be beneficial if they understand the real market they're in and how to capture that economic growth.

Your basic premise that most firms are run by irrational management, who don't understand how to maximise profit, simply isn't reasonable.

Not at all. My basic premise is that it takes time for firms to recognize these fundamental economic realities, but more do so every day. And if you're working for a firm that doesn't, then you're going to be in trouble.

I'm an optimist here. I believe that firms absolutely will work this out. It just takes some time, because this path may be more difficult at times, even if it will be more lucrative.

How can you possibly suggest that information goods aren't differentiated?

I was talking about a single information good. A single copy of a song is no different than any other copy of that song.

Once information has already been created, the absence of IP rights would effectively allow perfect competition, but the initial creation of the information is crucial: it isn't something like air that's "just there", it's something that requires investment of resources to produce.

Indeed. Again, I feel like I'm going around in circles here. The INITIAL creation of an infinite good IS a SCARCE good. In other words, you absolutely can get someone to pay for it, and there are more business models we see that take this into account every day. Witness Maria Schneider and Jill Sobule who have done exactly that.

Your problem is that you seem to think that the only reason people would pay for the creation of an infinite good is to exploit the IP rights on it. That's simply untrue.

I would be surprised if you can find any reputable industrial economists who would argue that perfect competition would be optimal in dynamic setting with technological progress, even if it were practicable.

Then you know a lot of dumb industrial economists, frankly. Pushing a commodity good to its marginal cost via perfect competition to greatly stimulate the market of the much larger complementary goods is very much an optimal outcome.

That's simply nonsense. The overwhelming majority of goods and services are sold at prices that exceed marginal cost.

I was talking about information goods.

In a dynamic model, the extent of protection of IP in one period influences the quantity of IP produced in the next period, so there is a trade-off between maximising distribution of currently existing information and promoting production of new information.

Indeed. And I've never suggested otherwise. What makes you think I did? Yet, when you look at the dynamic models, you recognize that it's *still* more efficient without IP protections. That's because of the value that those information goods provide to other scarce goods. That will greatly outweigh the cost of creating them. You just need to have the market set up properly so that those who fund the creation are also positioned to reap the rewards from the scarce goods. That doesn't require IP.

Rubbish. Through much of history, before the advent of IP rights, the norm was to keep information secret to the greatest extent possible. The creation of intellectual works tended to require either independent financial means or a wealthy sponsor. The advent of intellectual property rights led to an explosion of information creation.

Actually, that's getting the story backwards. It's one that the IP believers like to tell, but the reality is the opposite. Stronger IP laws have consistently come after the explosion in information creation, and it's as a way for those responsible for that creation to protect it and rest on their laurels rather than continuing the effort.

What market? Without IP there is no price for information, and hence no market. In the same way, abolition of physical property rights would eliminate the market for physical goods, although their rivalrous nature would lead to a more destructive outcome than abolution of IPR (ie physical property rights are more essential to society).

The overall market for goods is what I'm talking about. In establishing a fake market for information goods by creating artificial scarcity, you distort the market and make incentives for creating just those information goods, rather than the combination of infinite and scarce goods which lead to real economic growth.

As for the removal of property rights on tangible property, you're exactly right that it would be destructive. That's why we have property rights on scarce goods. In order to better handle the efficient allocation. But such rights aren't needed on infinite goods, where there's no efficient allocation to worry about. There's only the question of creation -- and that's taken care of by market demand for the scarce goods that are made more valuable by the infinite ones.

I'm not sure what sort of research you're reading, but the idea of a trade-off between underproduction and underutilisation goes back to the work of William Nordhaus in 1969. Widely cited journal articles, such as William R Johnson's 1985 classic in The Journal of Political Economy, suggest the possibility that unlimited copying reduces social welfare, and that restrictions may thus improve it. On the subject of patents, I could refer you to the 1990 paper in the RAND Journal of Economics by Gilbert and Shapiro, which presents conditions under which the optimal patent policy is narrow but infinitely-lived patents.

For every paper you cite, I could cite one back showing the opposite, and much of the work showing the damage done by IP is more recent, often taking into account Romer's work on economic growth (and all the work that followed after that). The work you refer to all pre-dated Romer's work and don't take the wider market impact into account Though, I'll also say that I think Romer's own conclusions from some of his work doesn't make sense from the paper itself -- he got the details right, but the conclusion backwards. However, I think more recent economic research will set this record straight (and I think Romer will figure this out himself, if he hasn't already).

I see your view of trademarks is also unorthodox.

Really? There are tons of folks who agree. Trademark law does not come out of the "promote the progress" clause but separate law. It's quite clearly designed as consumer protection, rather than as a property right. It's only in recent years that IP lawyers have tried to make it out as an IP right.

You imply in one sentence that there is no need for intellectual property rights, and then in another make an argument that effectively depends on the existence of such. Please clarify your position.

I fail to see how I made an argument that depends on the existence of IP laws. Can you point out what sentence exactly?

If you're trying to claim that the value of a book is in the paper, and not in the information, then that is a self-evidently absurd proposition.

I said no such thing. In fact, I said the opposite. I said the VALUE is in the words. But it's value that's infused into the scarce good of the bound paper.

If, rather, you're arguing that the book and the information are actually two different goods, and that the book is a complementary good, then I think you're missing the point that producers sell them as a bundle. Nobody would buy an empty "book".

Yes, I am arguing that they are two separate goods and that producers sell them as a bundle. That's always been the case. That's the whole point I'm trying to make. TO make a product worth buying you will always need to bundle the scarce good with an infinite good. Trying to separate them out is a problem. Just as few would buy an empty book, few will buy just words. You need to bundle them to create the scarcity necessary for a price to be charged in a competitive market.

People have trouble paying for goods that they can easily get for free. It has very little to do with whether or not the goods in question are rivalrous.

It has everything to do with whether or not they're rivalrous. It's that infinite nature that makes the supply curve lie flat on the $0 price line, and that's why people inherently don't believe that file sharing is the same as theft. It's not. It's more economically efficient.

Kingdon Of Loathing

You should check out KingdomofLoathing.com It's a free game (a friend of mine got hooked on it some time ago). Anyway, it originally started out with a donation jar to cover server expenses and then there was a "donate $10 and get a magical-what's-it in game" and from there a money making trend was created.

They created a scarce resource within the free game in order to drive profits. And now there are t-shirts, bumper stickers, and other merch. The guys running the game make a fairly large salary for running a "free" game.

Learning how to use your skills and creativity to draw people in and get them to part with their money in exchange for it is the idea. If you don't provide what I want, when I want it, I'll find a way to get it when and how I want it.

Re: Natural price

Mikebob replied:
I'd love for you to point to a single economist who recognizes this (other than a socialist one, I mean).

Wouldn't it be a wonderful world? Unfortunately, it's not the world we live in, where price actually is driven by the intersection of supply and demand, which is what drives price to marginal cost.

Mjr1007 replied:
Have you lost your freaking mind? Let's just look at two industries mentioned here, oil and software. Oil is so far above the natural cost, you know COG+Profit, let alone the marginal cost that we very well may see another round of windfall profits taxes. As for M$, well they've been one of the most profitable companies in history. Actually knowing something about reality just doesn't seem to be your strong suit, does it Mikebob.

I don't have to point to a single economist who thinks that a business has to make a profit, it's basic business. Surely they must have taught you about making a profit in the Cornell MBA program. Driving something toward the marginal cost, however it's defined, is not the same thing as it being the marginal cost. That difference is the PROFIT. This is something that good CEO's fight for. How to increase their margins.

Mjr1007 wrote:
There is no Profit in zero revenue

Mikebob replied:
Nor has anyone been suggesting a zero revenue model... other than you.

Mjr1007 replied:
Of course no one has suggested any other serious revenue model either. There has been the occasional travel agency suggestion or the ground breaking idea of concerts but nothing to really replace the lost revenue from content sales.

Mjr1007 wrote:
This whole silliness about information wanting to be free, with all due respect to rms, is just absurd. As Steven pointed out, information is inanimate, it has no wants, one way or the other. The people who control the information want it to be captive, the people who don't control it, want it to be free.

Mikebob replied:
This is a misreading of what has been said. We are simply talking about the competitive free market, under which information, by its nature (once produced) gets pushed towards a price of $0. You can deny it, but you'd be denying 230 years of economic understanding.

Mjr1007 replied:
Mike get over yourself, I was talking about rms, not you. And wouldn't that be 230 years of economic misunderstanding. Oh please Mikebob, as stated in other articles, with all the different schools of economic thought which disagree on almost everything, except with you, of course, don't you think there may be just a tiny little bit of hyperbole there. Also once again getting pushed toward a price of $0 doesn't mean free.

Mjr1007 wrote:
The other problem people have with entertainment is how a very few seem to reap almost all of the benefits. The easiest solution here is to just cap it.

Mikebob replied:
Beware of those who have no understanding of fundamental economics declaring "the easiest way..."

mjr1007 replied:
Great warning, one that is so easily applied to you. Oh no, now he has me doing “I know you are but what am I”.

Mjr1007 wrote:
Why not put together a P2P network where you buy the music and the people who share the music get a cut. If you eliminate the rent seeking record labels, then the price could be 10% of the iTunes price and the act could still make money. If it's capped at USD 100K per track, those very popular acts would be incentivized to produce more music, while the vast majority of acts would be able to make a living.

Mikebob replied:
That works until a musician recognizes that he can make more than $100k per track by giving away his content totally free. Then everyone abandons your model and *bam* then what?

Mjr1007 replied:
Let's say that giving away ALL music will make you more money touring, that by no means is certain but let's just say A Miracle Occurs (AMO) and it's so. I know more then a few musicians who would gladly take less money to get off the road. The same can be said for many of you other hair brained ideas, like turning musicians into travel agents. The point here is that to promote progress in the useful arts and sciences you need to focus on that, not making the most money from becoming a travel agent. But even if you were interested in making the most money it's hard to see how giving away some music or text as a gimmick to get some attention so you could then sell content, either directly to fans or to advertisers, wouldn't be more profitable then paying to give ALL of it away. Even Steven mentioned not wanting to go over his bandwidth limit. So much for free distribution.

It's hard to believe that a Cornell MBA, hasn't done a proper case study. Oh, right, no need for a case study when the goal is just to drive traffic. Not producing one means people can bicker for years, all the time increasing pageviews. Boy what a visionary!

Re: Re: Natural price

I know more then a few musicians who would gladly take less money to get off the road

Then they shouldn't be trying to make money by touring. And they won't make (much) money via selling their music in a digital medium unless they are really, really talented and they have a loyal fanbase.

But it isn't "piracy" that will hold them back. It is the fact that their fanbase will get access to other musicians' music freely, readily and legally. The other musicians recognize the benefit of free and increasing revenues from selling other things (concerts, shirts, limited editions, etc...)

So should those other musician be forced to limit the capabilities of their distributions so as not to ruin the business model of those who don't want to compete/travel/work hard/whatever ? Maybe we should stop all musicians from touring because it would be unfair to those who don't want to (or can't)?

Do you see the rat's hole this type of logic leads to? There is nothing we can do to stop musicians from giving their digital music away for free, which they will, and that will force everyone else to adjust the way they do business.

I actually hope that the RIAA and friends do continue with their archaic business model and approach to music. Hopefully they'll take down all the candy-floss acts with them and we'll be left with intelligent, creative and hard-working musicians.

Re: Re: Natural price

Have you lost your freaking mind? Let's just look at two industries mentioned here, oil and software. Oil is so far above the natural cost, you know COG+Profit, let alone the marginal cost that we very well may see another round of windfall profits taxes.

Oil being a scarce good run by a cartel. So, of course it's priced above MC. That's got nothing to do with your original claim that price is determined by COG + Profit.

I don't have to point to a single economist who thinks that a business has to make a profit, it's basic business.

Nor did I say differently. What I said was that price is set by the market. You said that it's COG + profit. While that may be the eventual outcome, it's not how price is set.

Driving something toward the marginal cost, however it's defined, is not the same thing as it being the marginal cost. That difference is the PROFIT. This is something that good CEO's fight for. How to increase their margins.

Indeed. And, in fact, despite your denials, that's exactly what I'm explaining how to do. But you don't do that by ignoring the market realities as you suggest they do. Hell, if you could just set the price at COG + Profit, why not set profit to some astronomical number? The answer is because the market wouldn't pay for it.

Of course no one has suggested any other serious revenue model either.

Other than, of course, all the business models we have been suggesting. But why let that stop you from pretending otherwise. I suggested the overall framework of the type of business model that works (connecting the infinite goods to uncopyable scarce goods) and then gave just a few examples of how that works in practice by some.

You, ignored the theory, and picked apart each example to explain why it wouldn't work (despite the fact that each example is working and proves the point).

It's hard to debate with you when you take such a tactic. It simply makes me again point out that there's almost no point in discussing this with you, since you clearly prefer to argue, rather than debate seriously.

And wouldn't that be 230 years of economic misunderstanding. Oh please Mikebob, as stated in other articles, with all the different schools of economic thought which disagree on almost everything, except with you, of course, don't you think there may be just a tiny little bit of hyperbole there. Also once again getting pushed toward a price of $0 doesn't mean free.

I don't deny that there are different economic schools of thought, but on the fundamentals most people agree. What you are suggesting disagrees with the fundamentals.

I have no problem discussing the different schools of thought beyond the fundamentals, but to throw out the fundamentals that have so much evidence behind them, you'd need to show at least a smidgen of evidence. Aren't you always demanding that I cite stuff? I find it difficult to accept that I should toss out centuries of economic evidence on your word.

Let's say that giving away ALL music will make you more money touring, that by no means is certain but let's just say A Miracle Occurs (AMO) and it's so. I know more then a few musicians who would gladly take less money to get off the road.

So let them work on a business model that doesn't involve them being on the road. I've pointed out a bunch of those business models as well. The one that made Trent Reznor $1.6 million in a week didn't require touring. The one that made Jill Sobule enough money from her next album didn't require touring.

But they did require attaching the infinite good to a scarce good -- and they did involve setting the music free.

So, you can certainly try to make people pay for music, but when everyone else is making plenty of money not doing that, those who rely on people paying directly for music will find themselves in a tough spot.

The point here is that to promote progress in the useful arts and sciences you need to focus on that, not making the most money

If making the most money encourages more people to create more content, isn't that promoting the progress?

But even if you were interested in making the most money it's hard to see how giving away some music or text as a gimmick to get some attention so you could then sell content, either directly to fans or to advertisers, wouldn't be more profitable then paying to give ALL of it away.

It may be difficult for you to see, but it doesn't mean it won't happen. Luckily, economics doesn't rest on your vision.

It's hard to believe that a Cornell MBA, hasn't done a proper case study. Oh, right, no need for a case study when the goal is just to drive traffic. Not producing one means people can bicker for years, all the time increasing pageviews. Boy what a visionary!

Ah, yes, the fifty or so different examples that have been discussed here over the last couple years. None of them count? The economic theory supported by evidence? None of that counts? The companies who have successfully put this into practice? None of them count?

Re: Re: Re: Natural price

Wow, once again Mikebob has come up with a stunning lack of understanding. Prices tend not to the marginal cost but to the natural price. If the market price goes below the natural price producers get out of the market which shrinks supply and raises prices. There is also the issue of low cost producers. Not all producers have the same cost, so more expensive producers can be getting out at the same time low cost producers can be increasing production. Am I going to fast for you? Therefore over the long term prices tend toward the NATURAL PRICE, which is for the low cost producer(s), marginal cost (assuming fixed cost have been amortized) plus profit. This is the fundamentals of economics.

Nice that you reponded to the oil example and not the MS example. Oil may be a scarce resource but in the world according to Mikebob, all things tend to marginal cost, except of course when they don't. M$ of course being the one most like the current topic. Digital content, easily reproduced and making a boat load of money by selling it. Of course if you were running M$ you would be giving away the software and sell T shirts and book flights to user's conferences to make up the difference.

The obvious point here is that both Oil and M$ have monopolies, which raises the price. Since the founding fathers of the US granted a monopoly to inventors and authors, you think they might just be able to squeeze out a little profit too? What do you say there Mikebob?

As far as all of your examples they tend to fall in to a few categories.

Selling digital goods, like Trent Razor. Which is not giving away all of the digital content, it just giving away a piece of it. Much like you see older installments of movies on ad supported TV when the latest release in the series comes out. The problem here is that CDs are digital and very fungible with downloads. If someone is willing to pay for a CD why not a track. I think Jobs has made a little bit of money off that, if memory servers.

Then there was the get the day job, like booking airline travel. For those who haven't been following this saga, I'm not making this up, this was really one of Mikebob's examples of promoting progress.

And there is also the very novel, concert tour. Mikebob must have been up long hours figuring this one out.

Mikebob wrote:
If making the most money encourages more people to create more content, isn't that promoting the progress?

What a stunning lack of understanding of the motivation of creative people. I'm sure most creative people are solely motivated by money. Once again Mikebob, just brilliant.

Now as far a making more money on giving away all of the music, why not give an example. Before you get apoplectic please note I asked for an example of making More money, not just making money. Of course what's the point here because you have show an absolute disregard for actually put forth a proper argument with proper citations. I'm sure you will either gloss over it with the scarce/abundant story or claim you example were people making more money. The point here is you claim that more money can be made by giving away all of the music, none of your examples demonstrate this. Many of them are selling the very same digital content you claim should be free. Your example of the IP problems with NAFT clearly stated the innovation is not free. This by a noble prize winning economist, you know the people who always agree with you, except of course when they don't.

Its funny that the argument is that up and comers have to invest their time for free in order to get ahead.

Um - duh - that has always been the case. Ten years ago I wrote a book. I didnt get paid for it. I shopped it around and guess what - the book had no value. No one wanted it. In other words I made the investment of my time. It proved to be a bad investment.

I know the situation is similar in music. Up and comers have to invest their own time and money in order to get ahead, and if they CAN convince someone they have a good product they will get paid.

So that hasnt changed. If you come up with a successful business model for making money on free digital books then publishing companies will still pay advances to well known authors who have proven that they can make money with that model. And just like before - up and comers will have to convince people that they can make a worthy product before they get paid for it - either by advances or by selling their product using the successful model.

WOWIO-

I give away books to readers all day. And make a buck from it. I have books on WOWIO.com and have found it to be a successful business model. For me, it is more successful than the pay-per-download model.

Advertisers buy space at the front and end of a book and pay for the space. Readers download the books for free after answering a survey. The survey targets the ads to the audience. I get a cut of the ad money.

Pairing advertising and free content works for broadcast TV. Why wouldn't it work in other applications?

Don't Forget...

the majority of books get written for free. They're called slush. Almost no one ever reads them, but people write on, undeterred... People always have done all the creative work for free. It'll be crap, but the cream will rise, as it always (mostly) has.

But it's not the end of the arts. Nobody ever had to pay a teenager to write emo poetry.

Like it or not, if you still want to get rich creating things, you'll need to work out a new angle other than direct sales of a mass-produced product. (I don't necessarily like it, incidentally -- it's made it vastly harder for me to get paid as a would-be radio journalist, when fools out there will give away their content for free. But there's nothing I can do about it.) Talking about "shoulds" in this case is no more meaningful than sheep talking about how wolves should be vegetarians.

And the fact that artists will need day jobs isn't necessarily a disaster. Shakespeare had one; so did Du Fu (traditionally called the greatest poet in Chinese history -- heck, this guy was writing poetry while fleeing from rebels and living as an impoverished refugee, so if you think it's hard for you to have the energy to write...) If you want to complain about how the modern world makes it nearly impossible to work a day job and still have energy to create -- YOU'RE ABSOLUTELY RIGHT, and it's a sure sign that we need to get to work changing a lot of how the modern world works, both for the artists and for everyone else who would like to be more than a cog; but it's probably easier to find a new business model and still get conventionally rich.

Are there any...

"digital" goods, and by this I embrace all "digital" goods in all industries dealing with such, for which the "give free, sell scarce" model is problematic?

Using high end application software as an example, some of which can be purchased in either CD/DVD form or as a downloadable digital file (depending upon a customer's preference), is the proposed "business model" as advocated, for example, for the music industry even vialble, and if so how? Please do not toss back OpenSource since that option for application software is but a drop of water in the ocean and oftentimes lacks the quality controls practiced by most applications software companies. For the sake of simplifying a response, perhaps it could be directed to products offered by Adobe.

Re: Are there any...

Using high end application software as an example, some of which can be purchased in either CD/DVD form or as a downloadable digital file (depending upon a customer's preference), is the proposed "business model" as advocated, for example, for the music industry even vialble, and if so how? Please do not toss back OpenSource since that option for application software is but a drop of water in the ocean and oftentimes lacks the quality controls practiced by most applications software companies. For the sake of simplifying a response, perhaps it could be directed to products offered by Adobe

MLS, you asked this question last week, but used CAD/CAM software instead, and I answered the question then -- to which you ignored the answer.

I'm not sure what good it does to repeat the question without responding to the original answer.

Re: Re: Are there any...

Yes I did note something about CAD/CAM software, but I believe the answer I got back was something along the lines, for example, of the software creator holding itself out as an independent contractor available for performing design work and, perhaps, even prototyping or subcontracting out for prototyping. Of course this is generally not how CAD/CAM software is used by system designers and integrators.

Hence my question. It is not meant to try and "set you up" for a sucker punch, but merely to probe some of the more challenging areas.

Re: Re: Re: Are there any...

Yes I did note something about CAD/CAM software, but I believe the answer I got back was something along the lines, for example, of the software creator holding itself out as an independent contractor available for performing design work and, perhaps, even prototyping or subcontracting out for prototyping. Of course this is generally not how CAD/CAM software is used by system designers and integrators.

Then you didn't read my answer completely. I was merely pointing out one of many possible ways that the software would get paid for, noting that for each use of the software there would be models that could pay for its creation -- and that many of those models would likely expand the market.

Facts matter

Facts matter much more so then opinions. Which is why, no matter how entertaining this all is, it should be based in facts.

Abundant is not infinite. There aren't even a googol of atoms in the universe let alone infinite atoms, so there can't possibly be infinite goods based on atoms, like disk or flash.

Cheap is not free, in downloads there are cost, even marginal cost.

These seem to be small points but they are symptomatic of a greater problem, the substitution of rhetoric and hyperbole for facts. This substitution is very entertaining and drives pagesviews, but is terrible way to discuss the future.

Mike and I have been going at it for sometime now about his views on IP. If you search for mjr1007 you will see quite a bit of posting. At first there was an attempt at an exchange of ideas. The problem was that Mike never posted proper citations. It was always along the lines of go read this book and you will see I'm right. No specific citation, chapter and verse as it were. The few times Mike actually posted something substantive, well it did not go well. It almost never agreed with his ideology. Pointing these things out only drove him to posting no facts and only opinions, and then claim, like his list of examples, proves his point.

The problem is, his examples really don't prove his point. Look at the Trent Razor example. In the first one, he wasn't giving away the downloads, he actually made money on them. In the second he was selling digital content, just not downloading all of it. The same is true for all of the examples I looked at. Many were interesting or quirky examples of people getting ahead, but in the end, they did want to sell their digital content. Free samples is not the same thing as free content.

For a while I was actually thinking Mike might be developmentally handicapped. Really, some of his writings were so off the wall. Of course some were being posted at 0300 hours so that might have had something to do with it also.

But then, he did an absolutely brilliant job of defending Lessig against a character assassin. He did all the things in defending Lessig that he never did in defending his ideology. He cited specific text and explain why the assassin was purposely misrepresenting things. The assassin just continued to repeat himself with absolutely no regard for the facts. That is the Mike the rest of us deserve.

Mike's strongest claim, in terms of grandest not most defensible, is that more money can be made by giving away content and tying it to higher cost items. The granddaddy of giving away music was the Greatful Dead, who actually had special seating for bootleggers. Of course the bootleggers didn't give the music away, they sold it. It is really hard to see how the band would have netted less money if they took a cut of the album sales. If you look at most of the experiments going on today, it's in the vain of free samples much more so then free music. Even some of Mike's examples are still selling content, just different types of contents. Some of the other examples are how to fund a CD, by getting fans involved earlier. It's just trying to defray the cost of CDs which will be sold later. Selling content, for most acts is the name of the game.

The other possible approach, would be ad supported. Not exactly news though, just turn on your radio or television for that. Yet both of these “free” approaches coexist with subscription services, like HBO and Sirius. It's hard to see how this approach won't work in the future, as long as creative people can control their creations.

The biggest problem most people have now, IMNSHO, is that prices have not followed cost, and the excesses of the very successful. The price of music tracks should be following the cost of electronics. If it did then most people would be less inclined to pirate. The record companies are an anachronism struggling to keep their monopoly. As more and more acts can, and do strike out on their own, the record companies will either find relevance or simply go away. It would be hard to believe that they would be able to continue to force acts to sign up. Once this happens then the price will come down and piracy will become less of a problem.

As far as the excess goes, really does J K Rollins really need a billion dollars to encourage her to continue to write. Limiting copyrights in both time and money seems very reasonable. Of course it also seems very reasonable to limit the size of companies and the pay of CEOs but since they are the ones who make campaign contributions it all seems very unlikely.

At slashdot when one speaks of free the question often comes up, “free as in speech or free as in beer?” What is needed is free as in speech but cheap as in beer. If you look at the open source movement, it seems that many of the big contributors are now working for companies that sell support for these programs. If the same model was applied, except the contributors could work for themselves and there was a compulsory license anyone one could use, think how many more wonderful programs would be out there. The people who create the IP would not have to try to sell there ideas to dilbertesque Pointy Haired Bosses (PHBs). They could strike out on their own. They might re-implement existing software to create a revenue base, and competition, before striking out. This would give them the financial security to pursue their own ideas. Some, maybe even many, would fail, but so what. The public would be the big winners, which is really how it should be.

Re: Facts matter

"Abundant is not infinite. There aren't even a googol of atoms in the universe let alone infinite atoms, so there can't possibly be infinite goods based on atoms, like disk or flash.

Cheap is not free, in downloads there are cost, even marginal cost."

I know what you're saying, but I think you're dwelling on the wrong points there.

It doesn't matter whether these things are literally free, or literally infinite. The point is that there is no marginal cost involved for the most part, nor are there any raw materials to worry about in manufacture of the goods.

I gave an example earlier of a (very inexpensive) hosting account I have which has hundreds of gigabytes of disk space and several terabytes of bandwidth each month. So, while those things are not *literally* free, if I were to host goods to sell on my hosting account, it would cost me the same whether I was selling 10 copies or 30,000 copies. So, these ideas are really not beyond the means of the average artist.

"The biggest problem most people have now, IMNSHO, is that prices have not followed cost, and the excesses of the very successful."

Exactly. People see the raw materials for pennies but get charged $15-20 at the till. Vastly reducing the price or even giving away the product for free may attract many more customers away from illicit sources, and even if the free model is used, there's plenty of other ways to get paid if you're imaginitive and resourceful enough.

Free Works: we prove it everyday

Everyday iCopyright processes about 5,000 "free" permissions for the big publishers like AP, Reuters, and Boston Globe. The important thing about these free permissions is that the publishers brand (logo), copyright notice and links don't get stripped. That allows people who see the reproductions to link back to the publisher. Ultimately, that's what they want -- more traffic.

The other really interesting piece of data is that about 3% of the users who get one of these free permissions, UPGRADE to a paid license. It might be a reprint or an ad-free eprint. This generates new revenue for the publisher.

We are trying to get the message out to bloggers and creators that this model works. Free is good, but as Mike says, it needs to be part of a larger, integrated strategy, that helps the creator to attract new readers and sell content in a "premium" form. To this end, we just launched a service for creators that helps them do this. And yes, it's free.

Free Does Work!

I have promoted 3 successful business for over 9 years by using free seminars as an introduction to paid services (typically workshops). Free is still the best way to introduce an uncommon service business.
There is however a fine line between giving too much in depth and quality, which can overwhelm people from the depth sometimes and not giving enough. I've found giving good quality for free attracts quality people who feel if the free information is good, the paid information must be even better.
As my professional is small business development giving away free to start is excellent. Its also a strategy I have used with success with various other clients as well. It works great for businesses who sell services that aren't well known and need an educational element to impact the value of their services.